by Broderick Perkins
(4/29/2011) Erate Exclusive - Fewer debit card holders than previously believed are opting-in for expensive overdraft protection, and that's good news.
However, those who do opt-in are often pressured or misled into signing up for the coverage.
The Center for Responsible Lending (CRL) conducted a survey earlier this month and found that only one in three of some 1,000 debit card holders surveyed chose to take overdraft coverage.
Previous studies, including one by Moebs $ervices said, "The overall consumer opt-in rate for overdrafts on debit cards and ATMs is 75 percent and is rising."
Debit (ATM) cards are typically tied to checking or other liquid accounts and used to make ATM withdrawals (and deposits) and retail purchases.
Federal rules say banks must notify debit card holders of their right to opt-in to (request) overdraft fee protection, which costs an average $35 each time a cardholder goes over their cash balance. The amount is about equal to the cost of a dinner for one, movie for two or a week of daily Starbucks stops.
For cardholders who do not opt-in, don't have another money account backing up their debit card account, and don't have sufficient funds in their checking, the lender must deny, without charge, the ATM withdrawal or purchase transaction.
Denying charges against an account with insufficient funds was how banks conducted business decades ago. Then they discovered the regulatory loophole of overdraft fees and began making what amounted to unsolicited payday loans.
Banks are projected to rake in $38.5 billion in overdraft fees in 2011, $2 billion more than the $36.5 charged in 2010, according to Moebs -- if those figures are correct.
With the loophole now closed, banks are looking for ways to dupe cardholders into opting-in and keep their vaults stuffed with overdraft fee cash.
Before federal overdraft fee regulations were put in place last year, the vast majority of consumers, 74 percent of those polled said they would opt out of overdraft fee protection, according to the National Federation for Credit Counseling.
CRL's survey this month shows a slightly higher rate of cardholders who've opted in because banks use "scare tactics and other misleading practices" to sign up cardholders.
The survey found that of the 33 percent of respondents who did opt in: Sixty percent said one reason they signed up was to avoid a fee if their debit card was declined. In reality, a declined debit card transaction costs zero. Sixty-four percent said another reason they signed up was to avoid bouncing paper checks. Opt-in rules don't cover checks, only debit card and ATM transactions. Almost half of those who opted in simply wanted the bank to stop barraging them with op-in messages by mail, phone, email, online and in person.
The report said Citibank and Bank of America ended fee-based overdraft protection because the majority of their customers didn't want it.
"But many other banks and credit unions still engage in this unfair practice. The Fed and other regulators should implement reforms that financial institutions can't circumvent through high-pressure, deceptive marketing," says CRL.
Here's a sample of the come-ons, ruses and head fakes found in overdraft coverage marketing materials collected by CRL:
Come-on: "We Need to Hear From You . . . To keep your account operating smoothly . . ." "To avoid any interruptions in how we service your account, we need to hear from you."
Fact: Do nothing, don't call your bank, don't opt-in and you are automatically opted-out of overdraft coverage. Ruse: "Your Debit Card May Not Work the Same Way Anymore Even If You Just Made a Deposit." "Please keep in mind that this option (not opting in) may prevent you from completing everyday transactions including: Any store and gas station purchase, emergency home and car repair...purchases when traveling, medical or health emergencies."
Fact: As long as you have sufficient funds in your account you can make purchases as you always have, without opting in. Keep in mind, in some cases, no matter how much you have in your account, your bank may have attached a single- or daily-purchase ceiling to your account, but this has nothing to do with opting-in.
Head fake: "Save money by avoiding retailers' returned check fees." "Relax and protect yourself from the inconvenience of an overdrawn account and retailer fees."
Fact: The overdraft fee rule has nothing to do with returned checks, or what your retailer may charge for a bounced check. However, you can bet your bank will gouge you on bounced checks, even if you do sign up for debt card account overdraft protection.
Lure: "You can protect yourself from the inconvenience of declined transactions and additional fees normally charged to you by merchants for returned items. (CRL emphasis added).
Fact: Again, the rule has nothing to do with retailers' fees, in this case, for returned items. Retailers typically have liberal, short-term (30 days), no-fee return policies on most items. You may have to pay a restocking or inventory fee for large items, but that's not impacted by federal overdraft fee rules.