WASHINGTON — Hoping to preserve more than $10 billion in annual fees, banks and credit unions are pushing hard for customers to accept costly overdraft protection on their debit and ATM cards.
The marketing blitz, which includes letters, e-mails and phone calls, comes on the eve of new consumer protections that are expected to strip much of the profit from overdraft fees.
Beginning Sunday, banks and credit unions no longer can approve and charge penalty fees for one-time debit-card purchases that exceed customers' account balances unless the account holders have agreed to "opt in," or accept overdraft coverage.
These transactions, along with ATM withdrawals that overdraw accounts, now will be declined for customers who don't accept the coverage. The rule took effect July 1 for customers who open new accounts.
For millions of consumers who've unwittingly overdrawn their accounts by small amounts and been stung by hefty penalty fees, the new Federal Reserve guidelines will put an end to one of the most expensive and aggravating trends in modern banking.
"For the first time in several years, customers will be able to use their debit card and ensure they don't spend more than they have," said Leslie Parrish, senior researcher at the Center for Responsible Lending, which works to end abusive financial practices. "There's still a lot of overdraft abuses out there, but this is really a great step forward."
Typically, banks charge about $34 to complete a card transaction that overdraws an account. The cash shortfall usually averages only $17, according to the Center for Responsible Lending.
For years, banks simply had denied these transactions. However, by allowing them to go through without the cardholders' consent and charging $34 for the "service," standard or "courtesy overdraft coverage" reels in more than $10 billion in debit card fees each year, the center estimates.
Most of that money comes from a select sliver of the customer base. About 5 percent of bank customers are overdrawn 20 or more times a year and spend more than $1,600 per person annually on fees, according to a 2008 study by the Federal Deposit Insurance Corp. These customers are disproportionately lower-income, nonwhite, single renters, Parrish said.
She worries that banks, armed with reams of demographic data, will focus their coverage sign-up efforts at this profitable yet vulnerable group of account holders, who live paycheck to paycheck.
"When you're targeting this at people who frequently overdraw their accounts, and you could otherwise just decline it for no fee, you're really threatening their financial stability," Parrish said.
Linda Sherry, the director of national priorities for Consumer Action, a nonprofit advocacy group, is advising all consumers, regardless of their income, to resist the entreaties and reject overdraft protection that carries flat-rate fees. She said that better, less-expensive alternatives were available, such as having checking accounts tap savings accounts, credit cards or lines of credit when cash shortfalls occurred.
ACTON Marketing, a financial marketing firm in Lincoln, Neb., surveyed 20,000 adults about their thoughts on overdraft programs that require customer consent. The company didn't respond to an interview request about the data, which will help banks design their programs and target their recruitment efforts more effectively. In a February news statement, company officials said banks that marketed aggressively could maintain or increase their fee revenue even with the new rules.
"The sky doesn't need to fall on banks after August 15," ACTON CEO Brian Beach said in the statement.
"We'll find the sweet spot for (insufficient funds) fees and determine what the consumer will accept," added Zach Gabelhouse, ACTON's director of modeling and statistical analysis.
Despite their optimism, most analysts think that the new regulations will trim participation in overdraft programs dramatically. The 2010 Debit Issuer Study by PULSE, a leading ATM/debit network, found that card issuers expect only 30 percent of consumers to sign up for overdraft protection. Estimates vary from 20 to 40 percent for large bank customers, while credit unions and community banks are expecting more than 70 percent to sign up.
As of Sunday, bank customers who want standard coverage must say so, or "opt in," in writing or online. The banks will send notices confirming the coverage and informing the account holders of their right to drop the protection anytime they want.
The new rules don't extend to checks and automatic bill payments, so banks can still approve these transactions when funds are insufficient and impose fees.
Those who sign up for standard overdraft coverage should understand that the protection isn't guaranteed. Banks can still block overdraft transactions at their discretion, such as when transactions exceed agreed-on dollar amounts.
Parrish said that some banks, such as Citibank, USAA and ING Direct, had never imposed overdraft fees on debit card purchases. However, they're a distinct minority.
A 2008 survey by the FDIC found that 81 percent of banks allowed overdrafts on debit card transactions and ATM withdrawals, but only 8 percent informed customers of their cash shortfalls before the debit card transactions occurred. Only 23 percent did so on ATM withdrawals. Advance notice would have allowed customers to cancel the transactions and avoid the fees.
In June, Bank of America, the nation's largest issuer of debit cards, began blocking all debit purchases that involve insufficient funds, while giving ATM customers the option of paying a $35 fee to make withdrawals that exceed their account balances.
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