by Broderick Perkins
(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?"
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.
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