Some Arkansas bankers are preparing for a dip in overdraft fee revenue as a result of the Federal Reserve Board's new rule that prohibits financial institutions from charging overdraft fees on some transactions without the customer's authorization.
Banking experts also said that, in order to meet the Fed's new requirements, a costly overhaul to banks' computer system will be needed. Under the new requirement, banks can only charge overdraft fees for automated teller machine and one-time debit card transactions to those customers who agreed to it. The new rule, though, doesn't apply to bounced checks or automatic withdrawals.
The revenue generated from overdraft fees has been rising and was estimated at $38.5 billion in 2009 - up from $36.7 billion in 2008, when the combined net income for U.S. banks was just $10.2 billion. The new regulation goes into effect on July 1.
Bank officials are unsure how much revenue they will lose from the customers who decline overdraft service, which allows the customer to make his purchase or withdrawal but charges a fee that averages $30 per transaction.
Some projections, however, place the loss at 15 and 25 percent of their overdraft fee revenue, said Jeff Platter, vice president of business intelligence for Haberfeld Associates of Lincoln, Neb., a consulting and marketing firm.
"The impact to the bank's profitability could be fairly significant," Platter said.
Some consumers who didn't realize they were overdrawn were shocked to discover overdraft fees of more than $100 after a trip to the gas station, Starbucks and the grocery store.
"The horror stories of the $40 latte or the 20 overdrafts in a day, that's really the exception," Platter said. "Five percent of customers account for 60 to 70 percent of overdrafts."
He said not all of those transactions are accidents, but the customers want the ability to have service and are willing to pay the overdraft fee.
First National Bank of Fort Smith, which charges a $27 overdraft fee, is going to send out notices encouraging customers to sign up for the overdraft protection, said Sam T. Sincard, executive vice president of the bank.
Sincard said he's not sure how many people will decline the service. But he said the bank expects a decline in revenue from customers dropping the coverage.
The overdraft fees are "significant to our bottom line, but I don't have an exact percentage," Sincard said.
To replace the lost revenue, some banks may end their free-checking options, said Arkansas Bankers Association President and CEO Ken Hammonds.
The new regulation also requires the banks to provide consumers who don't want the service the same account terms, condition and pricing that they provide consumers that ask for the overdraft service.
Most customers, though, will probably welcome the overdraft protection because they don't want their debit cards to be declined, said Don Woodland, executive vice president and director of the Graduate School of Banking at Louisiana State University.
"The bank's most profitable customer may not be the guy with the $200,000 in the CD," Woodland said. "It's the guy who writes the hot check every month."
Carol Kaplan, a spokeswoman for the American Bankers Association, agreed that customers will be willing to be charged an overdraft fee so their debit-card transaction isn't rejected when their checking accounts run dry.
"A lot of people want the comfort of knowing that if they're running a little short and they need to get groceries for their family, that they're not going to get turned down at the grocery checkout," she said. "What do you do then? Do you put all your groceries back?"
Some bankers in Arkansas said it's too early to project the impact of the regulation.
"We don't know how all of this is going to shake down or what to expect," said John Freeman, president of Liberty Bank of Arkansas, which is headquartered in Jonesboro. "It's still in the hands of our compliance officers."
In response to customer complaints about runaway overdraft fees, the Federal Reserve Board in November ordered banks and credit unions to get permission from customers before offering them overdraft protection.
"The final overdraft rules represent an important step forward in consumer protection," said Federal Reserve Chairman Ben Bernanke, in a November news release. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."
Before opting in, the consumer must be provided a notice that explains the bank's overdraft services, including the fees associated with it and the consumer's options.
The Fed determined that most consumers don't want the overdraft services for ATM and one-time debit card transactions unless they agree to it.
"Banks need to get moving on this quickly," said Michael Moebs, chief economist and CEO of Moebs Services Inc. of Lake Bluff, Ill., an economic research firm for financial institutions.
"Time right now is of the essence. And banks also need to be aware that this is not an easy implementation. This is one of the most complex implementations that banks have faced in at least 20 years."
He didn't think some banks or credit unions would be able to update their computer system in time.
"Currently, of the 308 operating systems for banks and credit unions in the United States, there's not a single one that can adhere to this regulation," he said.
Moebs projects it will cost a bank $25 to $50 per account to bring their systems into compliance with the new regulations.
Others say the cost is difficult to project because some banks will handle the conversion themselves while other banks have a contract already in place that requires their software providers do the work without an extra fee.
"It's on our own funding dime that we maintain compliance on behalf of our clients," said Fred Hopkins, director of product compliance for Fidelity Information Services (formerly Alltel Information Services) in Jacksonville, Fla., which provides technology services to the banking industry.
"It wouldn't be a big challenge for us" to implement the system, he said.
At first, Hammonds, with the Arkansas Bankers Association, said he thought the regulation would be difficult to comply with, but then changed his mind.
"I think if the banks can get the tech stuff worked out on the debit cards and overdrafts, I think we'll be OK," he said.
Banks also have to start contacting their customers to ask whether they want overdraft protection service.
Arvest Bank of Fayetteville is working on ways to reach its customers, said the bank's spokesman Jason Kincy.
The bank will use direct mail, signs and information on its Web site to spread the word about the change, he said.
Bank of the Ozarks Inc. of Little Rock also is in the process of determining the best method to inform its customers about the changes, said the bank's spokeswoman, Susan Blair.
She said the notification most likely will involve direct mail with follow-up telephone calls.
First National Bank in Paragould isn't sure when its customers will be notified of the changes, said the bank's president and CEO, Donald Gwinn.
"It's a little early to decide exactly what we're going to be doing and how we're going to be doing it," he said.