Finance Industry News

Beginning July 1, 2010 for new accounts and August 15, 2010 for existing depositors, banks will no longer offer automatic overdraft protection for ATM and debit cards. For those who like to “live on the edge” with their checking accounts and savings accounts, these changes may be significant.

Overdraft protection features

While automatic overdraft protection is disappearing, those who enjoyed and often used this feature may still “opt in” and notify their bank they want to keep this coverage. Even depositors who meticulously and diligently manage their accounts may want this “insurance” against a rare overdraft.

Fortunately, those creating an overdraft from checks or ACH (Automated Clearing House) transactions should still be covered as they were before. This should bring some comfort those depositors who sometimes “forget” about some outstanding checks or repetitive ACH withdrawals they have authorized. While your favorite bank should continue to provide protection, don’t assume that they will. Ask and learn if your institution will still offer this feature.

Most bank rates will be unaffected by these changes, but “bad boy fees” for overdrafts may increase. A more subtle affect will be an increasing difficulty for owners of checking and savings accounts to convince their bank to reverse overdraft fees. Formerly, banks were usually willing to reverse computer-generated overdraft fees for good customers. The new overdraft policies, however, will make these fees much more inflexible and permanent.

You should perform a checking and savings account comparison in light of these changes. It’s possible that you may find better bank rates and policies at another financial institution. On the other hand, you might confirm that your favorite bank remains your best option. If their overdraft protection policies are as favorable as other options, you can stay with your current financial institution with confidence.

Opt-in overdraft protection fees

Depositors must accept that these new regulations and policies will result in fees for overdraft protection. In years past, banks and credit unions would often cover overdrafts for short periods (24 to 48 hours) as a courtesy to depositors in good standing.

Federal and state bank examiners have always taken a dim view of this common practice. Technically, the bank is making a “loan” to the depositor without having any proper loan documentation. However, the practice has continued for many years.

The new regulations taking effect in 2010 will not allow this practice to continue for “cash” transactions. Those wishing to keep this protection can choose to do so, for a price. Many banks plan to adopt a sliding scale fee schedule. For example, a bank might charge one fee for an overdraft under $10, a higher fee for overdrafts under $25, and another charge for overdrafts over $25.

These fees are not to be confused with overdraft (“bad boy”) fees. Overdraft protection coverage, should you choose it, will trigger these fees when your bank pays your temporary shortage.

Some common bank action plans

Banks should take some or all of these actions because of these new regulations.

• Educate and inform customers clearly about these new required policies. Excellent communication, particularly about the opt-in overdraft protection options, is a high priority for all financial institutions.
• Inspire you to examine the way your checking and savings accounts are constructed. Does your account structure allow you to take advantage of, not be penalized by, current bank rates and policies?
• Add new, depositor-friendly features to the bank’s menu. To offset the perceived loss of a sometimes valuable service, banks may develop additional products to help increase your desire to keep your primary financial institution (PFI).
• Stress a new dedication to superior customer service. Many financial institutions will re-dedicate their focus on customer service to avoid negative public relations or fallout from these changes. Banks and credit unions must strive to eliminate any negative branding issues that could potentially arise.

Types of overdraft behavior patterns

You might be a bit surprised by the statistical breakdown of overdraft “behavior”:

• Those who never overdraft their checking or savings accounts: 70 percent.
• Those who occasionally (six or less times per year) overdraft their accounts: 20 percent.
• Those who habitually (seven or more times per year) overdraft their checking or savings accounts: 10 percent.

Even those in category one often believe that a far higher percentage of depositors overdraft their accounts. As you can see, consistent overdrafts are localized in a small percentage (10%) of all bank customers. Yet, this small group pays around 68% of all overdraft fees, which provide good revenue to financial institutions.

These new overdraft protection policies should affect a relatively small percentage of the population, but all depositors should be familiar with current changes. It is costly enough to overdraft an account without adding more expenses.