Banks are backing off harsh overdraft fees and policies. That's the good news. The bad news is, they'll probably look to make up that lost profit elsewhere.
It's a worrisome prospect for the vast majority of customers who never overdraw their funds and have grown accustomed to perks such as free checking accounts.
"Banks are going to have to get creative," said Bob Meara, a senior analyst with Celent, a Boston-based consulting firm for the banking industry.
That might mean the return of monthly fees or minimum balances for checking accounts, or the bundling of accounts with other services for a fee. Customers could also be steered toward lower-cost services such as online banking, Meara said. Use of debit cards, which bring banks revenue from fees paid by merchants, may be encouraged. And networks of bank branches across the country could shrink, too.
Such changes could help offset the steep losses banks face as they overhaul their overdraft programs, which have come under intensifying scrutiny in the past year.
Lawmakers are expected to soon start imposing new restrictions on overdraft fees, and the industry response has been swift. Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. all announced this week that they are easing up on the fees.
San Francisco-based Wells Fargo, which bought Charlotte's Wachovia Corp. last year, said Wednesday that it's changing its policy for Wells and Wachovia customers. It will not charge a fee if a customer overdraws an account by $5 or less, and will only charge that fee up to four times a day - down from 10.
However, the fee will remain at $35 for most overdrafts.
Wells Fargo's announcement followed a virtually identical announcement from Charlotte-based Bank of America. The bank said Tuesday that it will no longer charge overdraft fees if a customer's account is overdrawn by less than $10 per day.
It also said it would cap the number of fees at four instances per day, down from 10.
Bank of America's announcement is a sharp reversal from earlier this year, when the bank raised the overdraft cap from five to 10 instances per day. It also raised the fee this year for the first overdraft in a 12-month period to $35 from $25 - an increase that still stands.
Currently, most banks automatically enroll customers in overdraft programs, but the banks are making it easier for them to opt out. If they do, that means their debit-card purchases won't go through unless they have enough money in their account to cover it.
Many customers say they would prefer for their purchases to be rejected, rather than being allowed to rack up overdraft fees without realizing that they've depleted their account.
If customers choose not to sign up, it could mean an enormous loss of profits. Banks are expected to bring in $38.5 billion in overdraft revenue this year, up from $18 billion 10 years ago, according to economics research firm Moebs Services. The median overdraft fee is $26 this year, up from $20 in 1999.
The banks have said that customers usually prefer to be charged an overdraft fee rather than suffer the embarrassment or inconvenience of having their card rejected. They also point out that there are multiple ways that customers can avoid the fees, such as signing up for e-mail alerts for when their account drops below a certain amount.
But Linda Sherry, a spokeswoman for Consumer Action in Washington, D.C., said that most people, once given the choice, won't opt into the overdraft programs. She also said that banks will probably put a new emphasis on getting people to sign up.
"There going to find new ways to push the same product," Sherry said.
The reversal on overdraft policies by banks is no coincidence, as Congress is now turning its attention to debit cards after passing sweeping credit card legislation earlier this year.