The Federal Reserve passed new regulations last week requiring banks that issue debit cards to let consumers choose whether they want to pay overdraft fees for debit card purchases and ATM withdrawals and have the charge,  purchase, or withdrawal  go through even if they don’t have sufficient funds, or have it declined. This effectively makes consumers  “opt-in” to pay overdraft fees. This move by the Fed comes at a time when Congress is considering even tighter restrictions on the amount and frequency that banks can charge consumers for overdraft fees. The new rules take effect on July 1, 2010 and will not effect payments made by check or “recurring” debit card charges.

Sounds great, doesn’t it? No one would actually “opt-in” and sign up to allow a bank to charge an outrageous overdraft fee, would they? (Fees banks charge from overdrawn accounts are expected to reach 38 billion dollars this year!)  This seems like an easy question, but I have a feeling more people will sign up for overdraft fees in exchange for letting their payment be made, than many, including the Fed and Congress, might think.

Why would someone “opt in” to pay fees if they overdraft their account at all?

Well, I can think of a couple of reasons:

1.) Embarrassment of having one’s debit card declined.  I can imagine someone in  a long line at Walmart or somewhere with several hundred dollars worth of groceries not wanting to have the cashier announce that their debit card has been declined in front of everyone after all of their groceries were scanned and bagged. And what would they do then? Start removing items one-by-one until they got under the amount they had left in their account? That could really slow things down!

2.) Having to pay certain bills (such as electricity, etc.) that you have to get paid-otherwise you lose power, etc.

Keep in mind, I am sure banks will phrase the opt-in as if they are performing a service for you (for a minor fee of $30 to $40 per overdraft!) if you should make a math mistake or “forget” you didn’t have enough money in your account.

It is kind of a Catch-22, in a way. If you overdraft your account once every 10 years, and it has only happened by some mistake of your own (forgetting to transfer money from another account, for example), you may want to have overdraft protection from your bank and be willing to pay the fee instead of getting something declined and setting off all kinds of other problems. If you do it more often out of a lack of attentiveness to your finances, you might be better off letting your card get declined once in a while.

According to this article, 30 percent of overdrafts stem from checks, so limiting the overdraft on debit card and ATM transactions may not wipe them out completely for some people. Also, Congress is looking in to setting even more stringent requirements for banks charging overdraft fees, so there may be more in the works.

Another big question is this- If banks are losing a large portion of 38 billion dollars in revenue, where are they going to make that up? It has to come from somewhere, and it may be all consumers, not just ones that pay overdraft fees, that make up that lost revenue stream for banks.

{ 0 comments }