Research and Statistics

Consumers to Fed: Stop debit card overdraft opt-in ‘scare’ tactics


Federal regulators got an earful from banks and consumers on its proposed rules to change overdraft protection to an opt-in feature, including complaints that banks are using scare tactics to get customers to sign up

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Consumer groups are sounding the alarm that banks desperate to get debit card users to opt in to overdraft fees may use deception to dupe cardholders into agreeing to the controversial fees.

What: The public comment period ended Wednesday on the Federal Reserve’s proposed rules requiring banks to get consumers’ permission to charge ATM/debit overdraft fees when there are insufficient funds in an account to cover purchases. The Fed received more than 80 comments.

How soon does it take affect: After considering the comments, the Fed will publish final rules. Banks must implement them no later than July 1, 2010. They cannot charge overdraft fees to existing customers without prior consent after Aug. 15, 2010.

The Federal Reserve Board has proposed new rules that ban banks and credit unions from charging overdraft fees to customers who make ATM withdrawals or one-time debit card transactions that cause their accounts to be overdrawn. Banks can only charge overdraft fees on those types of transactions if they first get customers to opt in to overdraft services. Card users who don’t opt in can have their purchases and withdrawals declined at checkout or the ATM if they don’t have enough money in their accounts to cover the transactions.

If given final approval by the Fed, the overdraft rules would cover millions of existing U.S. debit cardholders as well as anyone who applies for a new debit card in the future. The rules are set to take effect July 1, 2010, and ban overdraft fees on existing accounts after Aug. 15, 2010, unless customers opt in. The regulators invited comments on their proposed rules; the Fed reports that it received more than 80 comments by Wednesday, the deadline for submitting them.

The proposal is already having an effect: Some banks, including J.P. Morgan Chase, have already begun to change policies and to send notices to customers urging approval to opt in to overdraft fees.

If you don’t contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 — even in an emergency.

— Chase notice asking consumers to opt in

“Your debit card may not work the same way anymore even if you just made a deposit,” reads a Chase notice. “If you don’t contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 — even in an emergency.”

‘Scare’ tactics?

Consumer groups cited the Chase notice as an example of banks trying to “scare consumers” into signing up for overdraft.

“They create the impression that the consumer’s debit card will simply stop working or experience significant problems in everyday usage,” according to the consumer groups who urged the Fed to take action to monitor what’s happening with overdraft opt-in letters. They want the Fed to require banks and credit unions to include a box on the notices that list the cost of alternatives to overdraft programs: linking the debit card to another checking or savings account or a credit card or line of credit.

A Chase spokesman said the bank is working to help customers understand its overdraft policies.

“Overdraft can be confusing, so we are encouraging customers to come in, talk to a banker and make an informed decision whether or not to opt in,” Tom Kelly said in an e-mailed statement.

Banks changing their policies

According to Kelly, as of March 29, 2010, Chase began eliminating overdraft fees when accounts are overdrawn by less than $5 and posting debit card and ATM transactions as they occur (rather than waiting until the end of the day — a practice that increases the likelihood an account will be overdrawn by virtue of the order that transactions are processed). In January, the bank also began limiting the number of daily overdraft fees to three instead of six that were allowed previously.

VIDEO: Should you enroll in overdraft protection?


New federal rules require banks to get your permission before they enroll you in overdraft protection. Should you opt in? Before you decide, watch this video.

Customers now can choose if they want overdraft services for their debit cards, and they will have a real-time ability to see their balances over the course of the day,” said Chase CEO Jaimie Dimon in a letter to shareholders released Wednesday. “These changes are ongoing and complex …While costly (we estimate these changes will reduce our after-tax income by approximately $500 million annually), we believe these moves will strengthen our long-term relationship with our customers.”

Chase isn’t the only major bank reining in overdraft fees ahead of the Fed rules. Bank of America announced in March it was launching a new policy to authorize point-of-sale debit card transactions only if card users have enough money in their accounts at the time of the sale.

Citi, which says it has a long-standing policy against approving ATM and point-of-sale debit card purchases when there are insufficient funds in customers’ accounts, commended its competitors for following Citi’s lead.

“On the eve of changing federal regulations, other banks are now telling customers they will also decline these transactions. This is a good thing, even if somewhat late in coming,” according to a March 18 Citi blog post. “Other competitors are now aggressively urging customers to ‘opt-in’ to debit overdraft coverage — in other words, asking their permission to cover charges that exceed their balances, and then charging them overdraft fees to do so.”

Costly for consumers, profitable for banks

Overdraft protection fees have ranged from $15 to $39, no matter how much the account is overdrawn. Some banks also charge additional fees for every day an account remains overdrawn. The example cited most often is a $3 cup of coffee that ends up costing consumers $38 to $40 once an overdraft fee is assessed for the transaction.


The fees have drawn criticism in recent months from members of Congress and consumer groups who say they are predatory, unfair and disproportionately impact the poor, elderly and minority groups.

The fees represent a growing source of profits for banks whose revenues are also being squeezed by recent credit card reform law restrictions. Economic researchers Moebs Services said banks garnered nearly $37.1 billion from consumer overdraft fees in 2009, up from $19.9 billion in 2000. They expect bank revenue from consumer overdraft protection to fall by about $2 billion in 2010.

Some withdrawals exempted

The proposed new overdraft rules only apply to ATM withdrawals and one-time debit card transactions, such as those at stores, gas stations or online retailers. Recurring debit card transactions, such as those set up to automatically pay utility bills each month, and regular checks and ACH (automated clearinghouse) transactions would still be subject to overdraft fees if account holders have insufficient funds to cover them. The Fed said consumer testing and research showed that account holders wanted overdraft protection on important bills like mortgage and utility payments, which are typically paid with checks and recurring card payments.

In the more than 80 comments filed with the Fed, it was clear that debit cards and overdraft fees have become a new battleground in the payment card industry.

Comments reflect the debit divide

Banks and credit unions asked for more time to implement the rules. Smaller banks and credit unions that do not charge overdraft fees and have policies against approving transactions when there are insufficient funds to cover them are outraged that they aren’t exempt from notification requirements. They must now spend money to mail letters informing their customers of their rights to opt in to programs that they don’t offer.

Several lenders complained that the overdraft restrictions appear to absolve consumers of the responsibility of managing their money and keeping track of how much is in their accounts.

There is no doubt that further action is needed. The rule addresses neither the high cost of the overdraft fee relative to the overdraft amount nor the frequency with which overdraft fees may be charged.

— Consumer group coalition

Consumer groups are seeking even stronger restrictions on overdraft fees, similar to those proposed by lawmakers in Congress. Lawmakers are considering bills (H.R. 3904 and S. 1799) that are more far reaching than the Fed rules and include bans on multiple overdraft fees during a single month. Those bills also seek to regulate how debit card transactions are processed by banks. Consumer advocates have complained that transactions are processed to maximize fees for banks rather than chronologically as they occur.

“There is no doubt that further action is needed,” according to a coalition of consumer groups that jointly submitted an 18-page response to the rules. They commended the Fed for making the overdraft rules apply to both new and existing debit card users. However, they noted that the rules ask customers to opt in to products that remain abusive to consumers. “The rule addresses neither the high cost of the overdraft fee relative to the overdraft amount nor the frequency with which overdraft fees may be charged. It also does not address manipulation of posting order to maximize overdraft fees. We urge the Board to move swiftly to propose rules, pursuant to its authority to address.”

The coalition included the Center for Responsible Lending, the National Consumer Law Center, Consumers Union, the National Association of Consumer Advocates and the Consumer Federation of America.

The groups asked the Fed to quickly adopt additional rules to:

  • Make overdraft fees reasonable and proportional to the bank’s costs.
  • Limit overdraft fees to six per year and offer customers who exceed that number lower cost overdraft protection plans.

Jonathan Mintz, commissioner of the New York City Department of Consumer Affairs, objected to the Fed allowing banks to use text messages when getting consent to charge overdraft fees. Although texting has become a popular form of social communication, its limitation on the number of characters that can be sent and inconsistent delivery of messages makes it a bad choice for opting in to overdraft fees, according to the New York consumer group. “The use of text messaging to educate consumers about important legal rights or to obtain informed and deliberate choice concerning potentially costly banking services flouts both the rules and their purpose.”

Mintz added: “The City of New York sees firsthand how these hidden fees have surprised consumers, eroded household incomes and driven frustrated consumers to use costly fringe financial services.”

‘Imperfect’ processing

Banks and credit unions admit they don’t always have the most up-to-date information on the amount of money available in an account. That’s because there can be delays at several points along the debit card payment process. For example, merchants, especially smaller retailers, may not submit purchase data immediately, but wait until the end of the day. The merchant’s bank also may have delays in sending the data to the debit card user’s bank. And that bank may delay posting withdrawal of the funds from the user’s checking or savings account. At ATMs, the networks (such as STAR or PULSE) may not have the most up-to-date information about recent deposits or withdrawals and can authorize a withdrawal believing the account has sufficient funds when it actually doesn’t.

Lenders say the processing delays leave banks with “imperfect information” about how much money is actually in the account and available for additional purchases.

“Consumers have access to perfect account balance information,” David Eberhard of State Bank of Southern Utah wrote in a comment. “They know exactly what checks they have written, what debit card purchases and ATM withdrawals they have made, and are completely aware of other automatic debits (ACH) they have authorized. Consumers also know how much and when any direct deposits are added to their accounts and when they will be available for use. All consumers who keep an accurate check register know exactly the amount of money available for their use without going overdraft. No amount of improved processing or updating systems by financial institutions will ever make up for this information gap between the consumer and the financial institution. This gap can only be filled by personal responsibility and accountability on behalf of the consumer.”

 Only 1 in 9 overdraft

Other lenders said overdrafts are a problem for a relatively small portion of customers. The vast majority of debit card users manage their accounts well.

“If this folly happens, we estimate that we will close 10-15 percent of our consumer accounts,” wrote Robert A. Steen of Bridge Community Bank. who added the rules were “outside of the role of the Federal Reserve. We decide what we charge for our products and services …”

Several credit unions — noting that they don’t allow customers to overdraw their accounts — argued only banks and lenders that actually offer overdraft protection should be required to send notices obtaining consent to opt in to the service.

“I think the time and energy put into this effort to protect the consumers from excess banking fees might have been better spent educating the consumers about responsible spending and keeping track of what they have spent and what they have left available to spend to avoid incurring the fees in the first place,” wrote Jen Bresina of Connexus Credit Union.

Consumer NaTasha R. Gilcreast wrote that she, too, was charged multiple overdraft fees and feels the new rules should address the order that transactions are processed: “I had the hardest time regaining my budget when this happened to me, instead of one $35 charge there were three. I may have been able to cover the one charge, but the extra charges spun me into a financial crisis, and had they been processed in order there would have only been one. I feel that I am being taken for a ride with my own money, and it is unethical.”

In his comments, Peter P. Mackin defended those who overdraft: “The people that routinely encounter problems similar to these are not usually check kiters or criminals. They are also not always irresponsible people who aren’t keeping track of their money. They are average, hard working Americans who were trained to do basic accounting one way their whole lives, to find that these overdraft rules take advantage of their tendencies.”

One credit union representative indicated consumers who repeatedly exceed their limits could have their debit card charging privileges revoked. “What will happen is that if a member does not opt-in, I will shut off their card for abuse and then they will be MAD, MAD, MAD because they have lost the convenience of the card. Is this what you really want to do to the consumers?” asked Jacki Lerdal in a comment.

What’s next?
The Fed will review the comments submitted by lenders and consumers and issue final rules before the July 1 effective date.

See related: Consumers must opt in to debit card overdraft fees, 6 ways to avoid debit card overdraft fees, Banks’ checking, debit card overdraft policies draw scrutiny

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