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The Bank Overdraft Fury That Wasn’t

From: "The Bank Overdraft Fury That Wasn’t", Star Tribune, Chris Serres, 3/5/11

A year after consumer advocates launched a crusade to protect the public from overdraft fees, tens of millions of Americans are voluntarily agreeing to pay them.

To the surprise of almost everyone, three out of four Americans with checking accounts have signed up for overdraft protection since November 2009, according to a new study by economic research firm Moebs Services. That's despite new federal rules that require banks to get permission before charging customers $25 or more when they overdraw their accounts.

The high enrollment rate defies popular wisdom, which held that people were fed up with the fees and would dump overdraft protection if given the choice. Last year, banks were widely attacked for charging customers multiple overdrafts on small purchases. "The era of the $35 cup of coffee has come to an end," declared an online article in the Huffington Post last August, after the new rules went into effect.

But public fury over the overdraft charges may have been more manufactured than real. People may grumble about the fees, but millions who live paycheck to paycheck rely on overdraft protection as a backstop when their accounts run dry, researchers say.

They also lack alternatives. Many consumers are signing up for overdraft protection, in large part, because they can't qualify for credit cards, home equity loans or other forms of short-term credit, say experts. Check writers also fear the embarrassment of having their payments rejected for lack of funds -- a fear that some banks have exploited to get people to sign up.

"Just because people are signing up for overdraft protection doesn't mean they like the fees," said Michael Moebs, economist and founder of the Lake Bluff, Ill., firm that bears his name. "Many just don't have the resources to go without" overdraft protection.

So far, 100 million of 130 million checking account customers have voluntarily enrolled in overdraft protection, which means they will continue paying the fees when their accounts dip below zero. Moebs points out that's more people than voted in the last presidential election.

Among those who frequently overdraw their accounts -- the very people consumer advocates were trying to protect by pushing for tighter regulation -- the programs are even more popular. So far, 98 percent of consumers who overdraw their accounts 10 times or more a year have agreed to overdraft protection, according to Moebs.

"Everyone in the industry is shocked," said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

Consumer advocacy groups argue that banks have used aggressive marketing to get millions to sign up. In some cases, banks suggested that checking accounts would not work properly -- or customers would be charged a bounced-check fee -- if they didn't enroll in overdraft protection, consumer groups maintain.

"There were a lot of scare tactics," said Gail Hillebrand, a senior attorney with Consumers Union in San Francisco. "Banks were basically calling and inducing people into thinking they had to do something, when in fact they didn't have to do anything at all."

Big source of income
Banks had reason to be aggressive. This year, they stand to collect a record $38.5 billion in overdraft income, according to Moebs. It remains the single largest source of service-charge income among retail banks. The median overdraft fee this year rose from $27 to $28, the first time it has gone up in a recession in more than 40 years, according to Moebs. The median overdraft charge among large banks, those with assets of $50 billion or more, is even higher: $35, Moebs found.

After the new rules went into effect last August, many banks pitched overdraft protection at every opportunity. Customers received telephone calls, postcards and e-mail reminders. The average bank sent out four notices, though some sent out 15 to 20 per customer, according to Moebs.

TCF Financial Corp., the Wayzata-based regional bank, was particularly aggressive. In addition to sending postcards and e-mail alerts, TCF's tellers pitched overdraft protection as customers walked into a branch or pulled up to a drive-through window.

The marketing blitz proved effective. About 90 percent of TCF's new customers enrolled in overdraft protection since the new rules went into effect. About 65 percent of its existing 1.3 million checking-account customers enrolled.

'Embarrassment insurance'
Bankers strongly object to the accusation that they misled or scared customers into signing up for the product. Under the new regulations, banks were required to provide consumers with a standard "opt in" form, including a description of overdraft fees and less-expensive options, such as linking checking to a savings account.

"Could you possibly find a client who was confused? I'm sure you could," said Rick Hartnack, vice chairman of consumer banking at U.S. Bancorp. "But there is absolutely no chance that millions of people were hoodwinked by a clever cabal of 8,000 banks. That's ridiculous."

Many people view overdraft protection as "embarrassment insurance," says Hartnack. They'd rather pay a fee than have a supermarket cashier or a restaurant server tell them their payment has been rejected. "For many people, the possibility of having their checks rejected may be threatening to their self-worth and image," Hartnack said.

Moebs, whose firm monitors trends in 1 million checking accounts nationwide, said he's noticed another interesting development: Enrollment in overdraft protection surged just after major holidays. To Moebs, this suggests that consumers view overdraft protection as a means to engage in periods of extra spending.

"Bubba and Bubbette want to have their romantic Valentine's Day weekend, and they're going to overdraw to do it," Moebs said.

But even bank executives such as Hartnack say they are surprised that so many customers enrolled. At U.S. Bancorp, the opt-in rate has been about twice what the bank projected. The bank declined to disclose the actual figure.

"Americans voted, and they voted for overdraft protection in a landslide," said Jeff Platter, vice president at Haberfeld Associates, a bank consulting and marketing firm in Lincoln, Neb.

Written By: m.moebs
Date Posted: 3/23/2011
Number of Views: 2995