I think. BofA is eliminating overdraft protection on debit card purchases. Most stories, like in the Times and the Journal, are headlining the elimination of overdraft fees, but it’s not like you’re getting overdrafts for free; actually they are eliminating overdrafts on debit card transactions altogether, starting this summer. (You will still be able to opt in to overdraft protection for debit card transactions, but only if you link your checking account to another account, so the money is being transferred from yourself. You will also be able to opt in to overdraft protection, with fees, for checks and automatic bill payments;* and you will be able to decide on the spot if you want to pay a fee to overdraw your account from an ATM.)
Banks Paying Customers to Take Overdraft Protection
By James Kwak
I saw a bank ad in the subway yesterday. Basically, it said:
- If you set up direct deposit the bank will give you $100.
- If you set up overdraft protection the bank will give you $25.
- If you activate online bill pay the bank will give you $25.
1 makes sense because (a) it gives the bank more cheap deposits, which are its raw material and (b) it increases your switching costs. 3 makes sense because it increases your switching costs; it may also cause you to give the bank more cheap deposits, since you need money in the account to cover your bills.
2 makes sense because . . . the bank expects to get more than $25 in fees out of the average customer. A single overdraft fee typically costs more than $25. Now people will be making an explicit decision: “I want the $25 now because I don’t think I’ll ever pay an overdraft fee.” (To be fair, they might be thinking, “I already value overdraft protection at $35 per occurrence, so the $25 is just a bonus.” But I doubt many people think overdraft protection is worth $35 per transaction when the typical transaction is a lot less than $35.
There’s nothing illegal about this, and arguably it’s a smart business decision. It just makes things perfectly clear: the banks want those fees so much they are willing to pay you for them.
“Please Keep This Valuable Service”
By James Kwak
Here’s a letter submitted by a reader, originally from Chase, encouraging her to keep overdraft protection on her checking account.
Note to Congress: You Are Not the People You Serve
From a Washington Post article on proposed legislation to regulate overdraft fees:
“Rep. Spencer Bachus (R-Ala.) said he avoided overdraft fees with a credit line and asked if many of the problems could be eased with consumer education.”
Good on you, Spencer. You have a credit line — which many of your constituents can’t get — and you have it linked to your checking account — which many of your constituents wouldn’t even know how to ask for.
Nessa Feddis of the ever-helpful American Bankers Association added that “most consumers can easily avoid the fees by keeping track of their balances.” (That’s a quote from the Post article describing her testimony, not from her testimony itself.) Hear that everyone? Keep track of your balances, and just in case, get a credit line and link it to your checking account. Problem solved.
The people who are financially sophisticated already know how to track their balances and turn off overdraft protection if they don’t want it. They are not the people that financial regulation is supposed to serve. You can’t discharge your duty as a representative of the people just by wishing that the people were more like you.
By James Kwak