New federal rules are aimed at containing big debit overdraft fees
New federal regulations are about to kick in aimed at helping people avoid getting blindsided by big debit card overdraft fees. banking, fees, atm.
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Come the end of the week, you won't have to worry anymore about inadvertently spending $35 for a candy bar or can of Coke -- unless you want to.
New federal regulations are about to kick in aimed at helping people avoid getting blindsided by big debit card overdraft fees.
The new overdraft rules require banks to get customers' permission before enrolling them in so-called courtesy overdraft protection on ATM and debit card transactions. Previously, many banks automatically enrolled people in the programs, generating billions in overdraft fees.
The way the programs work, customers can rack up hundreds of dollars in fees making everyday purchases with debit cards before realizing their account is overdrawn. Buying a $2 bag of chips at the convenience store, without the funds to cover it, triggers the typical $30 to $40 fee.
Often banks will tack on an additional charge, called a "continuous" overdraft fee, if the account remains overdrawn for more than a few days. Fees are compounded by banks' proclivity for subtracting the biggest transactions first, making it more likely the account is overdrawn.
Under the new rules, people who don't expressly opt in to overdraft coverage by the end of the day Friday will simply have their debit card purchases or ATM withdrawals denied if there's not enough money in the account. (The changes were effective July 1 for customers opening new accounts.)
The new regulations don't affect checks or online bill payments, which can still overdraw an account and trigger fees.
The new law is poised to curtail a major source of revenue for banks, which last year collected an estimated $38 billion in insufficient funds and overdraft fees. PNC Financial Services Group, Pittsburgh's biggest bank, has said the changes were expected to cost it $145 million in the second half of this year alone.
With so much on the line, some banks have launched aggressive campaigns to convince people to sign up for overdraft protection.
"It's a vital revenue stream. Banks are certainly wanting to protect that revenue stream," said Greg McBride, financial analyst at Bankrate.com.
Citizens Bank, the second biggest bank in Pittsburgh, has been mailing notices to customers explaining the new rules and following up with e-mails urging customers to act.
"ACTION REQUESTED to avoid changes to your account" was the subject line in an e-mail to Citizens customers in late July.
As of last week, PNC had not sent any e-mails about the new rules, a spokesman said. Mailers gave a phone number for people to opt in to coverage.
Both the Citizens and PNC mailers noted that customers who do not want coverage do not need to take any action. Customers who change their mind later can opt in or out at any time.
"For most people, there's no need to opt in," Mr. McBride said.
If a debit card transaction is denied, "that [usually] is not a crisis" because people have other payment options such as cash or credit cards, he said.
For some strapped consumers, however, the choice might be harder.
"No one wants to pay a $35 overdraft fee so they can get a latte and a scone. But if you're 300 miles from home and the car breaks down and you have no other method of payment, do you want that transaction to go through? Everyone will have to decide what's the best course to take," Mr. McBride said.
But even opting in to coverage does not guarantee that all transactions will be approved.
As PNC's mailer explained, "The bank has the discretion to approve or decline a transaction that causes the account to become overdrawn."
Some industry observers have been warning that banks faced with declining revenue would look for ways to make up the shortfall, such as hiking other fees or doing away with free checking.
Mr. McBride said a lot would depend on what types of customers continue to participate in overdraft protection.
A yearlong Federal Deposit Insurance Corp. survey found that 14 percent of account holders generated 93 percent of overdrafts.
"If that 14 percent overwhelmingly opts in, then maybe banks don't take the hit to overdraft revenue that some of the forecasts were indicating," Mr. McBride said. "Then maybe they won't be so quick to limit free checking or hike other fees."
Overall, roughly 25 percent of Americans planned to opt in to overdraft coverage, according to an online poll last month by the National Foundation for Credit Counseling. The organization called the unexpectedly large percentage "disturbing."
Banks offer another form of overdraft protection less costly than courtesy coverage. It pulls money from a customer's savings account to cover a deficit in checking.
Because customers are using their own money to cover the shortfall, not borrowing from the bank, the fees are much lower, typically $10 per occurrence.
A linked account "is something everyone should have because everyone can slip up," Mr. McBride said.
Of course, there has to be money in the savings account to tap.
First Published August 12, 2010 12:00 am