A study by ACTON Market Intelligence found that more than half of customers (57%) would opt out of overdraft protection if given the choice today. That suggests banks and credit unions could take a big hit on fee revenue under new regulation requiring them to get customers' permission before enrolling them in overdraft protection. Bank of America is going beyond the new requirement; beginning July 1, it won't allow customers to overdraw their accounts on debit purchases whether they are enrolled in overdraft protection or not.
But what if consumers could pick, or even set, the criteria for overdraft protection to kick in?
Obviously, no one wants to pay a $35 overdraft fee on the proverbial $5 cup of coffee. But a number of people might be willing to pay that sum to make sure a $500 credit card payment or $1500 mortgage check clears. Paying thirty-five bucks might be less painful than having a red flag on a their credit report.
The criteria could be as simple as the size of a transaction. Customers could opt-in for overdraft protection only on transactions that are bigger than the overdraft fee itself - although this is such a no brainer in terms of customer service that you'd think banks would be offering it already. Or consumers could pick a minimum transaction size, say $100 or $500, for overdraft protection. Anything smaller would be declined if there were insufficient funds.
Another option would be to let consumers pick payees, such as a mortgage servicer or credit card issuer, for whom they'd want to have overdraft protection.
No doubt it would cost banks money to offer this kind of customization. But it might be more cost-effective than not offering it.
Scott Mills, APR President William Mills Agency
[Editor's note: the following is from a reader's email.]
A key consideration seems to be missing from the discussion of Bank of America's decision to stop authorizing purchases on debit cards that trigger overdraft fees.
I agree that this move will help to strengthen B of A's trust factor with its clients and that this, in the long run, will prove to be a good thing for the bank. But the bank stands to benefit more immediately from this move: customers will have to choose from a smaller set of product options that are all easier to understand than the complex overdraft opt-in option. B of A is demonstrating that it understands what customers really want from banks and delivering on this should drive sales of new fee-based services at the bank.
B of A can now market alternatives for customers that will actually benefit them relative to overdrafts: monthly fee-based accounts, automated transfers for a nominal fee, or even a credit line - including a B of A credit card that could immediately be pulled out of a wallet at the point-of-sale when the debit transaction is denied. The bank is surely savvy enough to segment its customer base relative to these simple replacement options to ensure recoupment of lost revenue over time.
It's surprising that so many bankers seem to regard this move by B of A as something that will be viewed negatively by the bank's customers. The people have spoken: they don't like to spend money they don't have and they don't like surprise fees. This move by B of A responds well to customer sentiment, but it also enables the bank to simplify the options for its customers and make pricing more transparent - which suggests the bank also understands customer behavior and what motivates it.
Mary Beth Sullivan
Managing Partner
Capital Performance Group LLC
Washington
[Editor's note: the following a reader's response to the above comment.]
Agreed!
Paying small dollar debit card transactions into overdraft is NOT a value added service to consumers. While banks are deploying strategies to have customers "opt in" to debit card overdrafts, I believe that the majority of consumers will take a pass on the "opportunity".
However, paying checks and pre-authorized ACH into overdraft is still a service to consumers since it allows the consumer to avoid a second presentment NSF fee, merchant NSF fee and possible late charges.
G. Michael Flores
President and CEO
Bretton Woods Inc.
A portion of the Fed's rule (205.17)(b)(4)is up for revision amd comment until March 30 furthered this two-tier system by stating that institutions that do not have a policy of paying debit overdrafts may "assess an overdraft fee without consumers affiramtive consent it an authorized transaction settles on insufficient funds." Bob O'Meara Director of Research Raddon Financial Group