Banks Start To Lose Their Appetite for Juicy Overdraft Fees

Having lost one brawl with Congress this year over credit cards, big banks apparently are in no mood to fight about another increasingly political issue, overdraft fees. Leading debit card issuers Bank of America Corp. on Tuesday and JPMorgan Chase & Co. on Wednesday announced major changes to their overdraft-fee policies. Press releases from neither bank linked their new, more consumer-friendly policies to bills filed or pending in Congress that would regulate overdraft and non-sufficient funds (NSF) fees. When asked by Digital Transactions News if political pressure had anything to do with Chase's changes, a spokesperson said, “We know that people have legitimate concerns about these fees, especially around debit cards, and we want to address them.” Small transactions were the main focus in revising the policies, he added. In BofA's release, Brian T. Moynihan, president of consumer and small-business banking, said, “We want customers to have clarity and simplicity in everything they do with us. We started with the Clarity Commitment in home loans. Last week, we announced a simplified credit card offering that includes an easy-to-understand Basic credit card. Today, we are announcing changes to the way customers can manage their day-to-day finances that will help those who need it most right now.” On Sept. 18, U.S. Sen. Christopher J. Dodd, D-Conn., the powerful chairman of the Senate Banking Committee, said he planned to introduce legislation that would require banks to get customers' permission for overdraft programs. Two overdraft regulation bills already have been introduced in the House of Representatives. And the Federal Reserve in January mandated better overdraft disclosures starting Jan. 1, 2010, and is considering further regulations. Big money is at stake. In a research report earlier this year, Boston-based Oliver Wyman cited Federal Deposit Insurance Corp. data that estimated banks' service charges on deposit accounts had risen from $16 billion in 1994 to $39 billion in 2007. Some $29 billion of 2007's total was NSF-related. Add credit unions' NSF and overdraft fees and the total comes to $34 billion, Oliver Wyman said. Overdrafts have been providing a steady income for debit card issuers for some time as the popularity of the cards has exploded. An electronic-payments consultant estimated nearly four years ago that NSF fees on signature debit cards accounted then for anywhere from 30% to 50% of all the revenue issuers earn on these cards (Digital Transactions News, Dec. 1, 2005). Under current practice, many banks offer overdraft protection automatically on demand-deposit accounts and let customers take their balances below zero without warning, with the bank covering the check or debit card transaction. This, of course, generates fees, especially with the huge growth in consumers' use of debit cards for purchases in recent years. Plus, the fees themselves have risen, with many banks now charging over $30 per transaction. Dodd also noted that some banks process their check and debit card transactions in such a way that the biggest transactions clear first on a given day, making overdrafts more likely on smaller transactions. A $5 debit card purchase on an overdrawn account thus can easily cost the cardholder $35 to $40. The two banks' releases indicate that they're trying to address the criticisms. Under revisions to take effect in 2010's first quarter, Chase will: eliminate overdrafts for debit cards unless the customer opts into such services; modify posting to recognize debit card transactions and ATM withdrawals as they occur; eliminate overdraft fees if a customer's account is overdrawn by $5 or less; and reduce the maximum number of overdraft fees per day to three from six. BofA is making its changes in two phases. Beginning Oct. 19, the bank will not charge overdraft fees when a customer's account is overdrawn by less than $10 for one day; not charge overdraft fees on more than four items per day; improve the process for customers to opt out of overdraft service; and issue improved disclosures. Effective next June, BofA says it will introduce an annual limit on the number of times customers can overdraw their accounts at the point of sale when they do not have sufficient funds; contact customers who are nearing the annual limit “to provide education and tools to help them better manage their finances,” and limit overdraft capability?and fees?for customers who reach the annual limit; and provide new customers the choice to opt into the overdraft service when they open accounts. A 2008 FDIC study of bank overdraft programs found that 74% of DDA accounts incur no NSF/overdraft fees, but that 5% of accounts incurred 20 or more NSF transactions annually and accounted for 68% of fee revenue, according to Oliver Wyman. “Our immediate priority is those customers who excessively overdraw their accounts,” Susan Faulkner, customer segments and deposits executive, said in BofA's release. Robert Meara, a banking analyst with an Oliver Wyman subsidiary, Boston-based Celent LLC, tells Digital Transactions News that NSF/overdraft fees are “increasingly viewed as untenable,” both politically and in the marketplace. He notes that besides the pressure from Washington, competitors such as USAA and ING Direct are offering free overdraft protection on some accounts, and others are bundling accounts to raise balances, thereby reducing the chance of incurring an overdraft fee. “These changes [by BofA and Chase] represent a step in the right direction,” he says. “I would expect more banks to follow suit.” That said, NSF and overdraft fee revenues are now so large that banks will “need to be creative” in finding replacements, he adds.