If you’re a consumer with a debit card, you can expect to hear the same two words again and again and again from your bank or credit union between now and Aug. 15.
“Opt in.”
It refers to a change in federal banking regulations approved last fall requiring banks to get their consumer customers’ permission to honor debit card purchases and ATM withdrawals on an overdrawn account and charge a fee for the service.
If you don’t opt in, one-time purchases and ATM transactions will be declined if there’s not enough money in the account to cover them.
The new rules in the Federal Reserve Board’s Regulation E took effect July 1, when banks were required to ask new customers if they want that kind of overdraft protection. Banks were given until Aug. 15 to get approvals from existing customers.
A statement issued by the Federal Reserve Board of Governors in November when the rule change came about said it had made the decision after the agency’s consumer research showed “most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions unless they affirmatively consent, or opt in. At the same time, testing shows that most consumers want overdraft services to cover important bills, such as checks they use to pay rent, utilities and telephone bills.”
The statement quoted Elizabeth A. Duke, who heads the board’s committee on consumer and community affairs, as saying, “Overdraft fees can be costly. Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs.”
The change doesn’t affect other overdraft protection arrangements, such as using a savings account or line of credit as the first line of defense.
The change doesn’t affect the bank’s discretionary authority over honoring checks, or regular electronic withdrawals, such as for insurance premiums or utility payments. And the new rules don’t apply to business or commercial accounts.
“Until the technology is there, at the point of sale, where a customer would have the information that allows them to elect whether they want to continue with a transaction, Reg E makes a reasonable alternative,” said David Seim, vice chairman of Plains-Capital Bank Lubbock.
Not all banks and credit unions are affected. Smaller ones were excluded based on size.
And even some of the nation’s biggest banks have opted out themselves. Bank of America, the nation’s largest debit card issuer, said in March it would decline purchases if the account has insufficient funds, while people trying to withdraw money at an ATM without enough money in the account are told they can continue the transaction if they agree to a $35 fee.
Almost two weeks ago, a dozen Lubbock banks took the unusual step of issuing a joint statement encouraging customers to think it over.
Overdraft fees charged in the Lubbock market range from $20 at Security State Bank to $38 at BBVA Compass Bank.
“Many of our customers use their overdraft limits without ever realizing it or paying anything for it,” said the statement, which was issued by Aim Bank, American Bank of Commerce, American State Bank, Citizens Bank, City Bank Texas, First United Bank, Lubbock National Bank, Peoples Bank, Platinum Bank, Security Bank, Southwest Bank and Vista Bank.
The statement used the example of someone who knew they didn’t have enough money in their checking account to pay for a planned purchase.
“So you make a deposit to your account that will credit during nightly processing. At lunch, you go to make the purchase using your debit card,” the statement said, adding with overdraft protection, the transaction would go through and no fee would be incurred because the deposit would be credited to the account before the day’s debits are deducted.
“If you did not agree to the overdraft protection on your account, then the previous transaction would be declined at the merchant due to insufficient funds, possibly causing you embarrassment and inconvenience,” the statement says.
PlainsCapital’s Seim said: “The vast majority of our customers do not overdraw their accounts. And we make available the technology to keep up with their accounts. At the end of the day, it’s up to the individual in terms of how they conduct their business.”
The banking customer “wants a free checking account with overdraft protection, and we provide it,” Seim said, adding it provides customers some measure of security in case of an error in their check register or some other minor problem arises.
“A significant number of customers really prefer that service,” Seim said. “They expect the bank to pay and are fine with paying whatever fee is associated with that service.”
All local banks have made internal efforts, as well as reaching out through advertising, to let their customers know the change is coming.
The new rules end a decade of battling between consumers and the banking industry over what’s been an increasingly lucrative revenue stream, especially as consumers didn’t realize how the process worked.
Several years ago, banks began including in the fine print of debit card agreements a provision that said they could, at their discretion, pay ATM withdrawals and debit card purchases if the account was in the red and charge the customer a fee.
Consumer groups and regulators watched as the income rose over the years.
According to Moebs Services, a Lake Bluff, Ill., economic research firm that analyzes financial institutions, consumer overdraft revenues — income from debit card transactions, as well as bounced checks and other transactions not affected by Regulation E — rose from $19.9 billion in 2000 to $37.1 billion last year. At the same time, the median overdraft price nationally rose from $20 to $26.
The consulting firm’s forecast for this year estimates a slight decline in overdraft income to $35.2 million, while the median overdraft price rose to $27.
At the same time, two major class-action lawsuits in federal courts also challenged banking practices. One, filed against Wells Fargo on behalf of its California customers, accused the bank of restacking transactions at the end of the day to create more overdraft fees from debit card transactions.
The bank’s policy had been to re-sort the charges by transaction size from largest to smallest, rather than posting them to the account in the order they were made during the day.
The result, according to plaintiffs’ arguments in the case, now pending in the U.S. District Court of Northern California, was someone who made several small purchases early in the day and waited until late to make a big purchase that would overdraft the account found the big transaction paid and one or more of the smaller purchases treated as overdrafts — even though the bank’s automated system said there was money in the account when the purchases were made.
The suit, filed in November 2007, went to a bench trial before District Judge William Alsup in San Francisco. The trial ended last week and Alsup advised both sides he would need two weeks or longer to rule on the case.
At the same time, five class-action suits against some of the nation’s largest banks alleging the banks all manipulated the order of transactions to increase overdraft fees, were consolidated in U.S. District Court in Miami earlier this year. The defendants include Wells Fargo, Bank of America, Citibank, JP Morgan Chase, U.S. Bank and Wachovia.
Ironically, Moebs Services’ CEO, Michael Moebs, says the big winner with Regulation E’s change could be the payday loan industry.
The average overdrawn on checking accounts is less than $100, said Moebs in a recent news release.
“Consumers who use a payday advance loan for $100 or less will pay an average of $17.97, which is 33 percent less than the $27.01 it costs for an overdraft of that same amount from a checking account.”
Moebs suggested banks would be wise to lower their overdraft fees to below $20.
“Because 90 percent of a bank or credit union’s revenue comes from overdraft fees, they could increase their revenue and their volume by lowering overdraft fees,” Moebs said. “This would enable them to maintain their revenue at 2009 levels.” He noted that in a way, the banks and payday lenders are dealing with the same customers because payday lenders require their borrowers to have checking accounts.
