Select the search type
  • Site
  • Web
Banks Score Victory on Overdrafts

From: "Banks Score Victory on Overdrafts" Financial Times, Suzanne Kapner, 6/25/10

Banks appear to be scoring an early victory against new rules designed to curb fees they charge customers who overdraw their accounts.

Their success is a sign that not all of the recently passed legislation designed to protect consumers will necessarily result in lower revenue for financial institutions.

Banks have been urging account holders to "opt in" to the new service agreements ahead of rules that take effect on July 1, which require customer permission before charging fees to cover debit purchases and ATM withdrawals that exceed account balances.

Convincing customers to continue paying for overdraft fees is a rare win for banks at a time when other sources of revenue, especially from credit card transactions, have been curtailed by new laws aimed at cracking down on predatory lending practices.

Initial projections called for the new credit card and overdraft restrictions to cost the industry upward of $17bn.

But now some analysts are cutting those projections based on signs that the hit to overdraft revenue, which totalled $37bn in 2009, will be less severe than anticipated as banks convince customers to continue paying for the service and sign on new ones.

"By 2011, it will be back to business as usual," said Michael Moebs, a consultant.

Many large banks have so far declined to publicly disclose the level of "opt in" rates they are seeing, but anecdotal evidence suggests that a larger-than-expected number of consumers are signing on to the programmes.

"We're hearing that banks are getting a higher-than-expected opt in rate," said Scott Siefers, an analyst with Sandler O'Neill. He said investors will focus on the issue when banks start to report second-quarter earnings next month.

Only about one-quarter of the 130m chequing account customers regularly overdraw their account. Analysts said that banks are concentrating on retaining that core group.

But some institutions are also using the rule change as an opportunity to reach out to new customers.

Roughly 850 banks have started offering overdraft services, more than the 770 banks that have eliminated the service, according to Mr. Moebs.

An additional 130 have lowered prices, which can cost as much as $34 for each overdrawn transaction, in the hopes of convincing more customers to sign up for the service, he said.

Not all banks are taking that approach. Bank of America is eliminating the service and Citigroup said it never allowed account holders to overdraw funds at ATMs or through debit purchases.

As some of these big banks withdraw, smaller community banks are seizing an opportunity to expand their account base by convincing customers that overdraft is a necessity.

Written By: rnybeck
Date Posted: 8/26/2010
Number of Views: 2282