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New Overdraft Rules May Result in Higher Costs for Everyone

From: "New Overdraft Rules May Result in Higher Costs for Everyone", Fox Business, Ken Sweet, 3/12/10

Consumers across the country cheered new regulations unveiled this week that, in some cases, will lead to the end of bank overdraft fees, but that excitement may have masked some serious downsides: the U.S. banking industry now faces a $40 billion potential drop in revenue, and may need to start charging all of its customers for basic services to make up the loss.

Banks have a mid-summer deadline to implement new policies regarding overdraft fees, a result of years of consumer complaints over banks charging fees as high as $40 per debit transaction when a customer had a negative balance. Some customers were often hit with multiple overdraft fees, which could rack up quickly if they heavily used a debit card instead of cash.

While a sore point for customers – the story of the $40 cup of coffee is infamous – it was a lucrative source of revenue for the banks. Overdraft fees brought in $38.5 billion to banks' pockets in 2009 alone, according to Chicago consulting firm Moebs Services.

The new Federal Reserve rules, effective June 1 for new accounts and August 15 for existing accounts, require banks to get their customers to “opt-in” to overdraft protection programs. If a customer chooses not to have overdraft protection, ATM or debit card transactions will simply decline at the point-of-sale instead of going into a negative balance if a customer doesn't have enough money.

In response to consumer pressure and the new rules, some banks are already doing away with overdraft fees. Bank of America (BAC: 16.79, -0.06, -0.36%) said Tuesday it will do away with overdraft protection programs for debit card transactions. Other banks like JPMorgan Chase (JPM: 42.959, -0.241, -0.56%) have sent mailers to customers saying that they will need to “opt in” to overdraft protection if they want to keep it.

But many banks have become increasingly dependent on fees as a way to bring in revenue for their commercial banking operations. According to Moebs, the industry brought in $11.3 billion in fees in 1992, nearly doubling in 2000 to $19.9 billion and nearly doubling again in 2009 to $38.5 billion. The average fee has risen as well, from $15 per transaction in 1992 to $26 in 2009.

The potential loss of billions in revenue comes at a time when banks are still trying to recover from the financial crisis. While not all of the $39 billion in annual revenue will disappear with these rules, analysts, preliminarily, put the percentage loss between 20% and 40%, and that the revenue will have to be made up somewhere.

“The big firms are going to have to be more creative how they charge fees, and charge fees to more customers,” said Matt Albrecht, an equity research analyst with Standard & Poor’s.

An official with one of the nation’s largest commercial banks, who declined to be identified, said his firm is already considering reintroducing monthly checking account fees to more customers who don’t meet minimum balance requirements.

“There are two ways to make a profit off of checking accounts: the spread on interest rates or fee income,” the official said. “We will make less on one type of fee, so other fees may have to be considered.”

A monthly cost for checking accounts is not unheard of, with banks charging a small monthly fee for most checking accounts up until very recently. With the invention of “free” checking accounts, which were financed through backdoor fees like overdrafts, monthly checking account maintenance fees went away for a large percentage of U.S. consumers.

“Consumers were getting this incredible value of free checking,” said Sherief Meleis, managing director with the banking consulting firm Novantas. “Banks are going to have to come up with products, along with fee opportunities, to make up for the loss in revenue.”

Some banks have already changed their products.
Citigroup (C: 3.89, -0.07, -1.77%), which never charged customers fees on ATM or debit card transactions (instead they would just decline), recently changed one of its more popular checking accounts. Citi’s “EZ” checking account, which used to be free for customers with direct deposit and who used bill-pay services, now costs $7.50 a month for customers who have less than $1,500 average daily deposit balance in their accounts. Citi estimates 20% of its customers got one fee per year.

In essence, the small percentage of Americans who regularly incur overdraft fees – Novantas estimates 8%-14% of banking customers are heavy fee generators – will see their cost of banking decrease while Americans who don’t run a negative balance could see their banking costs increase.

“While the fees will be smaller, they will strike a larger base of customers,” Albrecht said. “Banks are going to push low-cost Internet-based accounts with face-to-face time costing customers money.”
These smaller fees could be what Dick Bove, banking analyst with Rochdale Securities, calls “nuisance fees,” or small charges to visit a teller, print out a statement at branch or ATM, use online banking or even have the bank issue a customer check.

In what might be an unintended result of these new rules, low-to-moderate income Americans, who consumer advocates believe these new regulations will help, might be the hardest hit economically. These more regular fees may cause more customers to close accounts and become what’s known in the industry as unbanked, or people with no access to a checking or savings accounts.

Written By: rnybeck
Date Posted: 4/1/2010
Number of Views: 2192