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by Broderick Perkins
DeadlineNews Group
(10/15/2010) New federal regulations forces banks to give consumers the
right to opt-out of overdraft service for debit card purchases and ATM
withdrawals, but banks are pumping up marketing machines to keep consumers
hooked on the costly service.
The Center for Responsible Lending (CRL) says banking
industry surveys that report customers are signing up in droves for
overdraft protection, don't reveal how consumers are being induced to keep
banks rolling in overdraft fee dough.
An Aug. 1 report by the National Federation for Credit Counseling (NFCC)
found that 26 percent of its 2,089 respondents planned to opt in to
overdraft protection -- even with a fee charged for the service.
But by month's end, the American Bankers Association's Ipsos Reid survey of 1,000
consumers found that 46 percent of bank customers reported they did – or
will – opt in to their bank's overdraft program.
"These results show that many bank customers value debit card overdraft
protection and are willing to pay for the service," said Nessa Feddis, ABA
vice president and retail banking expert.
"They are now in the driver's seat and control the way their accounts are
managed," Feddis said.
That's just marketing hooey, critics say.
It's more like consumers are being steered down the wrong road, fueled by
aggressive, even deceptive marketing campaigns designed to drive consumers
away from cheaper alternatives, headlong into an expensive service they may
not need.
Federal overdraft
fee protection rules, effective July 1, prevents ATM and debit card
transactions from going through if there isn't enough money in the account.
In the past, banks ushered such transactions through with hefty service
fees that amounted to small payday-like loans consumers never requested.
They can still charge for the service, now however, under new rules
, consumers must opt-in to set up overdraft protection and banks are wooing
them to do so because overdraft fee protection can be a lucrative
windfall.
Industry studies show that the average overdraft fee charged by a
financial institution is $27, with approximately half of the more than $37
billion generated in fees in 2009 coming from debit card and ATM overdrafts,
according to the NFCC.
Banks, anxious to retain these fees, have launched marketing campaigns
encouraging consumers to opt in.
Midwest-based, Commerce Bancshares, among the best performers
among U.S. bank and thrift holding companies during the recession, saw
earnings decline in the third quarter largely because of the new federal
overdraft fee rule, according to the company's own CEO David Kemper.
According to TheStreet.com, the company's deposit fees
totaled $21.7 million in the third quarter, declining from $25.5 million the
previous quarter and $27.8 million a year earlier -- nearly a $4 million
quarter to quarter loss and more than a $6 million year-over-year loss.
Overall, the company's quarter-to-quarter net income dropped from $59.7
million to $55.9 million -- a nearly $4 million decline indicative of the
impact of lost overdraft fee revenues on just one bank.
"Continuing strong revenues in debit and credit card products helped to
offset lower consumer deposit fees resulting from new regulations on overdraft charges implemented on
July 1," said Kemper inthe quarterly earnings statement.
"It is disturbing that this many people live so close to the financial
edge. Anticipating that they will overdraw their account, they are willing
to exacerbate the problem by paying a fee to have their purchases approved,"
said Gail Cunningham, spokesperson for the NFCC.
CRL says banks use guile to loophole the opt-in regulation by
• Not telling customers they won't be charged a fee when the bank
declines a debit card purchase that causes an overdraft. Some consumers believe
they will be penalized for overdrafts if they don't opt-in.
• Presenting customers with a false choice between no overdraft
coverage or a high-fee overdraft program.
• Not fully informing customers about lower-cost options such as a
line of credit or a link to a savings account. Sometimes using a credit card
would be cheaper than an overdraft charge.
• Subjecting customers to relentless, misleading marketing aimed at
steering people into the highest cost product.
• Implying that a debit card won't function correctly unless a
customer opts in or that high-fee coverage has some advantage over lower
cost options.
Asks CRL, "If customers really knew they had lower-cost options, would
they pick the most expensive one?"
Probably not.
NFCC says options banks often don't suggest, include:
• Linking your checking account to your savings account. If there's
an overdraft, the money will be automatically taken from your savings with
little or no fee attached.
• Keep your check register current, recording all withdrawals and
balancing often. Be sure to notate all ATM and debit card transactions
along with any paper checks written on your account.
• Pad your checking account by carrying a balance that you will not
likely exceed. Most people spend a similar amount each month.
• Go digital. If your financial institution offers it, sign up for
email or text alerts that notify you when your balance is low, reaches a
certain point or otherwise puts you in overdraft fee territory.
• Yank creditors' chains. If payment due dates don't coincide with
paydays, request a due date change. A little extra interest to cover the gap
for the first month will be worth what it could cost you over time and help
you organize your finances.
Other Articles:
Overdraft Fee Rule - Money Maker for Banks
Zero interest credit cards quickly melt down
Feds Clamp Down on Credit Card Abuses
More Problems for Banks Seen Looming on the Horizon
Lending Standards Stricter Industry Wide
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