The new debit card overdraft-protection rule the Federal Reserve Board approved last week does not prevent banks from abusing debit cardholders with excessive overdraft fees, contends the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization.

"The Federal Reserve Board's action on debit card overdraft fees legitimizes an abusive product without providing any substantive protections for bank customers," Eric Halperin, director of the center's Washington, D.C., office, said in a statement. "The rule does not prohibit institutions from charging an unlimited number of overdraft fees in a single day, even if the transactions are for small amounts, which most are. In fact, the typical debit card overdraft is for $17."

But the average customer overdraft fee was $34 in 2008, according to Leslie Parrish, the center's senior researcher in Washington (ADN, 10/1). Debit card overdraft fees are a major source of revenue for banks. In 2008, the nation's banks generated $39.5 billion in service fees, with the lion's share–$29.2 billion–coming from fees charged to customers for overdrawing their accounts, Parrish says.

Charlotte, N.C.-based Bank of America Corp., the nation's largest debit card issuer with 36.5 million debit cards at the end of 2008, collected $8.03 billion in debit card overdraft fees last year. Wells Fargo & Co., the nation's second-largest debit card issuer with 28.7 million debit cards, collected $2.35 billion, while No. 3 issuer JPMorgan Chase & Co., with 28.2 million cards, collected $2.94 billion, according to the center, which is based in Durham, N.C.

The Center For Responsible Lending collected the data from the Federal Reserve Bank, Parrish tells ATM&Debit News.

 The Fed's overdraft-protection rule announced last Thursday would force banks to get customers' permission before enrolling them into overdraft-protection programs. Congress should step in and help debit cardholders, Halperin contends.

Congress Expected To Add More Protections

Senate Banking Committee Chairman Chris Dodd, D-Conn., agrees Congress needs to do more. "We need to do far more to protect customers from abusive bank products," Dodd says. "We still need to stop the excessive fees, repeated charges, lax notification and processing manipulation that have become standard in these so-called overdraft 'protection' programs."

The overdraft rule goes into effect July 1 and covers debit card ATM and purchase transactions. Banks would be prohibited from offering different terms or conditions on accounts for customers who decide to forgo the program. Additionally, customers who decide to take advantage of overdraft-protection services could still decide to reject the coverage at any point.

Bankers, arguing that overdraft protection actually is a service for its customers, had pressed the Fed to embrace a rule that would let them instead give customers a chance to opt out of such coverage, betting that would have resulted in fewer accounts without protection.

Industry representatives acknowledged their disappointment with the Fed rule but seemed ready to move on."In the end, we could live with it," says Scott Talbott, a senior vice president with the Financial Services Roundtable.

That is likely because bills circulating on Capitol Hill could be far worse for the industry.

Proposals in the House and Senate would require  fees to be proportional to the cost a bank incurs during an overdraft. They also would bar banks from imposing an overdraft fee more than once a month and six times a year.

Under the proposals, customers would see a prompt on the screen of their ATM alerting them that their transaction could result in an overdraft, and banks could not manipulate the order of clearing checks in a way that can rack up fees.

The Fed issued its rule under Regulation E, which governs electronic fund transfers and does not have the scope to address check-clearing manipulation.

The proposals have powerful sponsors, including House Financial Services Committee Chairman Barney Frank, D-Mass., Rep. Carolyn Maloney, D-N.Y., Dodd and Sen. Charles Schumer, D-N.Y.

"The Hill doesn't give people a choice," says Nessa Feddis, senior federal counsel for the American Bankers Association. "The bills don't seem to reflect the very well-documented consumer preference for having overdrafts paid for particularly important things like mortgages and bills. That would mean they would be less consumer-friendly."

Overdraft Debate Has Been Fierce

Overdraft fees have become the subject of heated debate during the financial crisis. The Fed received more than 20,000 comment letters on an overdraft proposal it released in January. Banks say they offer the protection to save customers from embarrassment at the cash register. Consumer advocates counter that the fees often are unreasonable, especially when a relatively small purchase causes the overdraft.

In this fight, the Fed appeared to side with consumers. "The final overdraft rules represent an important step forward in consumer protection," Chairman Ben Bernanke said in a press release.

Overdraft fees do not disappear under the Fed's rule. Issuers still can assess penalties on a range of transactions, including checks and recurring debit card purchases. Fed officials speaking to reporters said they did not extend the opt-in provision to these transactions because customers generally use these methods to pay for important, big-ticket items such as rent or mortgages, along with utility bills.
Though that means banks still can earn some income from fees, industry representatives worry about the practical implications the Fed's differentiation could cause.

At the moment, most banks' computer systems cannot distinguish between a $3 transaction at Starbucks and a $100 monthly fee for a health club membership.
"Some institutions can't make that differentiation at this time," says Steve Zeisel, vice president and senior counsel at the Consumer Bankers Association. "Even differentiating between debit and checks is difficult. Smaller institutions in particular may be impacted by that."

Though the rule is likely to cut into bank profits in this area, industry representatives say they will find ways to protect themselves from habitual overdrafters and continue to make money.

The American Bankers Association's Feddis raised the possibility that banks may reverse the trend of offering free checking accounts and instead require customers to maintain a minimum balance to avoid fees.

 "At the end of the day, income has to exceed expenses for any business model to succeed," Feddis says. "There may be less income, so there's going to be pressure."
Lawmakers, meanwhile, are poised to press ahead. Maloney says the Fed rule does not "eliminate the need for congressional action."

"The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts," she said in a statement.

Schumer attempted to put some onus back on the central bank.

"I urge the Fed to add even more muscle to these rules by limiting the amount of overdraft fees that can be charged in a single month and by preventing banks from reordering charges to maximize profits," he said. "We will continue to do everything we can in the Senate to pass legislation to make this happen, whether the Fed acts or not."ATM

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry