Debit card users will need to sign up for overdraft protection programs with their banks, paying about $35 for any overdraft purchases. Currently, banks automatically enroll their debit card users in this program and use overdraft fees to generate $20 billion in revenue, according to the NYT.
So many people now dip their balance below zero that banks generated an estimated $20 billion from overdraft fees on debit purchases and A.T.M. transactions in 2009, according to Michael Moebs, an economist who advises banks and credit unions. All of this revenue is potentially at risk, since these are the two areas that the new Federal Reserve regulations cover. (Banks generate an extra $12 billion by covering checks and recurring bills; under the new rules, they can still cover those and charge fees without customers’ consent.)
Over the last decade, these fees have become an increasingly important source of income for banks as consumers have turned to debit cards to pay for a wide variety of their purchases, whether monthly bills or a pack of gum. (Many banks also offer less controversial overdraft programs in which consumers sign up to cover shortfalls in their checking account by pulling money out of a savings account or a credit card.) -- New York Times, Feb. 22, 2010
The "opt-in" overdraft protection program should be good for consumers with a back up plan in case of an emergency. If a person doesn't have enough money in their account, the card will be rendered useless without the overdraft protection. But that person should realize their account is dwindling, therefore should change their spending habits or carry an emergency credit card.
What this new regulation will do is prevent that person who thinks he/she has $10 remaining in their account (but only has $2) from buying the Subway $5 foot long at lunch (and paying $35 in overdraft fees).
So consumers can expect plenty of snail mail and e-mail from their banks in the next few months, advising them to sign up for the overdraft programs.
Some banks may be trying to confuse its customers in order to keep them in their programs, Planet Money's Jacob Goldstein wrote.
What's more, under a new law that takes effect this summer, overdraft purchases with debit cards will be automatically denied. People will have to sign up for overdraft protection if they want to be able to buy something that costs more than they have in their account. That means banks stand to lose a lot of the money they've been making from overdraft fees on debit-card purchases. (The new rules don't affect old-fashioned paper checks.) -- Planet Money, Feb. 24, 2010
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