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UPDATE: Economist: Bank Overdraft Revenue to Drop 5.1% in 2010

From: "UPDATE: Economist: Bank Overdraft Revenue to Drop 5.1% in 2010", Dow Jones Newswires, Kathy Shwiff, 3/24/10

Banks are expected to collect a total of about $35.2 billion in overdraft fees this year, down 5.1% from 2009 and the lowest amount since 2007, according to Moebs Services.

Still, the median overdraft cost is likely to increase 3.8% to $27 in 2010, according to the research firm. The median cost also rose 4% to $26 in 2009.

Economist Michael Moebs said the decrease in total fees is due to "the uncertainty of what will happen with financial reform in Congress" and the Federal Reserve's continuing review of overdraft policies of all types. Meanwhile, the higher median fee reflects increases instituted by big banks at the end of 2008 that have been adopted by regional and smaller banks more recently, Moebs said.

While overdraft fees are an important source of revenue for banking institutions, some big banks--including Bank of America Corp. (BAC) and Citigroup Inc. (C)--recently said they would eliminate those fees on debit-card purchases.

New federal rules on overdraft fees that take effect this summer will permit banks to charge overdraft fees on such transactions only if a customer opts into an overdraft program.

Currently, a customer's purchase is allowed to go through if it results in pushing the account balance below zero--but they get socked with an overdraft fee. Under the news rules from the Fed, customers would need to opt into an overdraft program to allow the purchase to go through. The purchase attempt would be declined if the customer isn't in a program and the transaction is bigger than the account balance.

Meanwhile, Moebs said uncertainty about congressional action as well as media reports about banks collecting big overdraft fees cost financial institutions about $2 billion of new revenue in the fourth quarter.

In addition to Bank of America and Citigroup, about 200 banks have dropped overdraft fees on debit and ATM cards because of the cost of changing their systems and retraining employees to implement the new Fed rules, Moebs said.

Meanwhile, 11% of about 2,000 banks surveyed by Moebs Services this month said they created overdraft programs. Many of the institutions entering the business are community banks and credit unions.

Of the more than 1,800 banks and credit unions that changed their overdraft policies since the Fed issued its new rules, more than half raised their fees while 18% lowered them--an almost-unheard-of practice, Moebs pointed out.

Written By: rnybeck
Date Posted: 4/1/2010
Number of Views: 3846