Say Goodbye to Overdraft Protection

On October 19, Senator Christopher Dodd (D, CT) of the Senate Banking Committee, proposed a bill to limit the amount and number of overdraft charges banks can charge customers. On Friday of last week, the Federal Reserve adopted a portion of that proposal regarding ATM and debit purchases, issuing it as a new rule while waiting for the rest of the bill to go through the legislative process.Today, the Fed has extended that rule,initially targeting ATM and debit card purchases, to include gift cards.

Dodd's bill is supposed to limit the charges a bank issues to customers due to using overdraft protection. Overdraft protection is a "courtesy" of the bank- When an item is presented for payment from a customer's account when the customer does not have funds to cover the item, the bank will pay the item plus a fee up to a predetermined limit, operating as an item-by-item short term loan. Fees are incurred per item paid and some banks have 'negative balance fees,' fees that are typically incurred daily for having a negative balance. The portion the Fed is adopting makes it illegal for banks to charge OD charges on ATM and debit card uses, two areas that are commonly used in kiting. Sure, it's stupid to get a $69 charge (from some banks) for a $.90 debit purchase, but overdraft charges are a significant part of a bank's income, regardless of the bank's size (though I have noticed smaller regional banks charge less than national banks).

In proposing this legislation, Senator Reed said that "most people never asked for overdraft protection and logically assume they can only spend the money they have," Reed said. "(This act gives) consumers more choices and (prohibits) banks from levying excessive, hidden fees on individuals and families who are struggling to keep their homes and jobs." When I worked the call center for my bank, 70% of the calls were about overdraft protection, to make sure they had it, and occasionally how to use it. As part of the Truth in Savings Act, banks are required to give customers a list of fees that could appear on their account, including Overdraft charges. Customers are required to sign a form stating they received the Truth in Savings Act. It is assumed by the bank that people want overdraft protection because no one wants to have a bill returned unpaid. If an account is opened WITHOUT Over Draft, the bank representative tells the customer. However, it has been agreed in my office that making an "opt-in" form at account opening detailing the rules of overdraft is a good idea and probably should have been enacted long ago.

The Senate bill limits the number of times a bank can charge for overdraft protection to 6 times per year, no more than once a month. This does NOT limit the times a customer can overdraw their account. As the Oklahoma Banking Association points out, "in some states – like Oklahoma – writing a check 'with the intent to cheat and defraud' a person, firm or entity and 'obtain . . . money, property or valuable thing' is a crime: a misdemeanor if the check is less than $500, and a felony if it exceeds that amount." The bill also limits the amount the bank can charge for overdrafts to "'proportional' to the cost of processing the overdraft," meaning that small banks will still charge smaller fees overall than big banks.

In my office, we are supposed to mitigate the losses of the bank and this bill is a big deal. For us, it means that we will probably no longer offer Overdraft protection because it will represent a loss to the bank (roughly 30% of revenue in some areas we cover). Alternatives have been proposed, such as a revolving loan, predetermined at the time of account opening, an "opt in," where a customer would choose how many or to what amount of check or ACH items they want paid if they do not have enough money to cover it in their account with a proportional fee charged either monthly or bimonthly, and simply not having overdraft at all. Returned check charges are in limbo- technically they aren't part of overdraft because they are a processing fee which is usually covered by a customer's account gaining the bank interest by simply having money with the bank, but the wording of the bill seems to include them. The OBA states, "Apparently they don't understand that there are at least two costs involved whenever a check "bounces" and is honored: one is for processing the item itself, and the other is for advancing the funds to cover the check." Return check charges are simply covering the processing cost.


As for debit and ATM cards, we've discussed some long needed changes and the Fed's new rule has made our discussions just in time.

Debit card transactions are likely to change drastically and not just from your bank: merchants are going to have to change the way they run cards too. Remember getting a $1 preauthorization from your gas pump? Preauthorizations will likely be for the maximum allowance for hotels, rental cars, and any purchase where the amount authorized could be different than the amount charged (like when you eat out and put a tip on your receipt) because authorizing banks will not be willing to authorize a charge that may overdraw your account because they will take the loss. Currently at my bank, a preauthorization shows up the day it is done and then falls off the account. After all, there is no guarantee that a preauthorization will lead to a real charge. This will likely change so that the preauthorization stays on the account unless and until the merchant puts through the "hard" charge or cancels the invoice.

ATM's...Well...The nation's ATM networks are a joke. The majority of ATM's seem to be based on a design from the 1970's or 80's, "stand alones" use a telephone line to dial their clearing house to do a simple verification, ie, "Will this charge clear this account?" and foreign ATM's (ATM's that are not owned by the same bank that you are transacting with) usually don't get any account information outside of verification (not even account balance unless a second transaction is initiated, which gets a second foreign ATM fee). We like the idea of having a pop up that tells customers that doing this transaction will overdraw their account, just like a real teller is supposed to do over the counter. Having ATM's use a secured internet connection is both cool and very risky. Installing alarms on ATM's so that they alert local authorities when they are "tampered" with will also help prevent further ATM losses due to skimmers and stolen debit/ATM cards.