Do consumers really want bank overdraft protection?
That’s a question the venerable Federal Reserve is studying in 2009. The Fed is mulling giving bank consumers the right to opt out of a bank overdraft program – and may even give consumers the right to have small debit card transactions canceled, rather than have them trigger an overdraft.
Public comments on two key consumer overdraft proposals from the Fed ended on March 30, and the Fed is expected to roll out its decision, most likely leading to some kind of overdraft reform, sometime this summer. The proposals would:
• Allow banks to notify bank customers of their right to opt-out of bank overdraft protection, but automatically include bank customers if they ignore the notice
• Require banks to get permission from bank customers before enrolling them in overdraft protection services.
So why the need for the fed to potentially intervene on bank overdrafts? In a word – fees – and a lot of them. According to a 2008 study from the Federal Deposit Insurance Corporation (FDIC), bank fees, on an annual basis, are a big cash cow for U.S. banks, worth $17.5 billion in revenue. The FDIC study also says that automatic bank overdraft fees can trigger fees ranging from $10 to $38 per overdraft. In addition, the FDIC found that 75% of U.S. banks automatically enroll their customers in automatic overdraft protection services.
Leaving the decision to consumers on overdraft protection, may be a welcome benefit to bank customers. But to make the right decision, those same consumers need to know how overdraft protection works, how big fees are triggered, and what they can do to minimize overdraft fees if they decide to opt in on such plans.
Here’s a snapshot of what consumers need to know about bank overdraft plans:
Keep a close eye on your checking account – Virtually all bank overdraft issues are related to either insufficient funds on checks you paid out, or not enough money in your checking account to cover a debit card purchase. Most banks will allow the debit card purchase to go through, and may even clear your check.