New regulations will soon require banks to get a customer's permission before charging fees to cover overdrafts caused by debit card purchases or ATM withdrawals.
Today, most banks automatically provide this service, sometimes called courtesy bounce protection, unless customers opt out. They say they do it to spare their customers the hassle or embarrassment of a debit-card denial.
But it comes at a steep price: $10 to $38 per transaction, according to a Federal Deposit Insurance Corp. study. If a customer makes several purchases in one day, many banks deduct the largest ones first to drive the account balance below zero so they can charge overdraft fees on the remaining ones. Some banks slap added fees on accounts that remain in the red.
Under changes to Federal Reserve Regulation E, which covers electronic funds transfers, banks and other financial institutions can no longer charge fees for this service unless consumers opt in and agree to them advance. The changes take effect July 1 for new accounts and Aug. 15 for existing ones.
The changes also will prevent banks from charging fees when customers withdraw more from an ATM machine than they have in their accounts, unless the customer agrees to the fees in advance.
Customers who don't opt in will have insufficient funds transactions denied, unless their bank decides to honor them without charging a fee.
The Regulation E changes do not apply to transactions made with paper checks or to recurring payments made by debit card, such as monthly health club dues.
They also do not apply to plans in which a bank covers an insufficient funds transaction with money from the customer's savings account, credit card or line of credit. Almost all banks already require customers to enroll in these plans, often called linked account or overdraft protection, in advance.
The new rules will affect the estimated 25 percent of people who overdraw their accounts at least once a year.
They will have to opt in to courtesy bounce protection or sign up for linked-account protection. Consumer advocates recommend the latter because they have lower fees, typically $10 per day versus $30 per transaction for courtesy bounce protection.
Better yet: They could avoid overdrafts by monitoring their accounts online or signing up for text or e-mail messages when their balance gets below a certain amount.
The new rules will indirectly impact the 75 percent of people who never overdraw their accounts as banks seek to offset lost revenues by imposing or raising checking account and other fees.
In 2006, insufficient funds fees accounted for 6 percent of total bank revenues and the majority of those fees, 90 percent, came from courtesy bounce protection plans at banks that offered them, according to the FDIC study.
When the new rules take effect, banks expect only 41 percent of customers, on average, will opt in, according to a survey by Aite Group.
Most banks have already begun recruiting customers to opt in.
"We have reached out to customers in a variety of ways, through statement inserts, online messaging, in-store communications," says Michael Billeci, a regional president for Wells Fargo, which owns Wachovia Bank.
"People are receptive to opting in," he says, declining to provide numbers.
Some banks hope to increase the uptake by slightly improving their programs.
In late March, Chase reduced its maximum fees to three per day from six and waived it on accounts overdrawn by $5 or less.
In September, Charlotte-based Bank of America reduced its fees to four per day from 10 and waived it on accounts less than $10 in the red.
The bank, however, ceased offering this service on debit card transactions effective June 19 for new accounts and will do so on Aug. 13 for existing customers.
"If you are at Target or Walmart and don't have enough money in your account, we won't authorize the transaction," says Bank of America spokesman Don Vecchiarello.
Elimination of the program will reduce the bank's service fees by about $500 million to $600 million per quarter. Its total first-quarter revenues were about $32.3 billion.
Bank of America hopes to make up for lost fees by working on its "long-term relationships" with customers, Vecchiarello says. The bank "is still evaluating" whether it will raise checking account fees.
Customers will have a variety of ways "to pay for the services we offer, whether it is through a monthly maintenance fee, increasing their balances or having more relationships with us," he says.
Customers should expect changes over the next several months and into 2011.
Bank of America customers will still be allowed to overdraw their accounts at the ATM machine, but only after they see and approve the fee on the screen.
Bank of America also will continue to offer overdraft protection linked to a savings account or Bank of America credit card.
Whether other banks eliminate courtesy bounce protection depends on the opt-in rate, says Greg McBride, senior financial analyst with Bankrate.com.
"A small share of customers account for a lion's share" of the fees, he says. "The consumers who repeatedly overdraw their accounts are least likely to have other options at the point of sale, such as a credit card or cash in their wallet."
Dick Bove, a bank analyst with Rochdale Securities, predicts that banks will make up for most of the lost fees by charging $12 to $15 per month for checking accounts. "If you have a mortgage, credit card or auto loan (with the same bank), you won't be charged the fee. For lower income people, the charge will be too much and they will give up the bank account."