US Banker  |  March, 2010

By Sara Lepro

Print Email Reprints Feedback

Bank of America Corp.'s plan to block debit card purchases that would overdraw accounts highlights a paradox in the market today: giving consumers fewer choices can be seen as customer-friendly.

Treasury Secretary Timothy Geithner lauded the plan, which is expected to cost B of A billions in revenue, as part of the "process of restoring the trust and confidence in customers." He openly urged other large institutions to follow the Charlotte company's lead.

But several such banks indicated they would not.

"You're not going to wake up and see the headline from U.S. Bank saying 'we're going to do the following things with overdrafts or debit cards or credit cards,'" U.S. Bancorp Chief Executive Rich Davis said at an investor conference Wednesday. "We are not going to tell consumers what they are supposed to do and we're not going to tell them what they are supposed to think."

Several hours before Davis made his remarks, B of A had announced that starting this summer, it will block consumers who do not have sufficient funds in their checking accounts from making debit purchases at the point of sale, instead of letting them overdraw their accounts for a $35 fee. (Overdrafts will still be possible from checks or automated teller machine withdrawals, which will continue to incur fees; the ATMs will alert consumers before proceeding with withdrawals if they would result in overdrafts.)

Susan Faulkner, B of A's head of deposits and card products, told reporters Wednesday that the decision was a response to consumers telling the company they did not want to spend money they did not have.

B of A's move goes above and beyond a regulation that will take effect July 1, under which banks will have to get consumers' consent before enrolling them in overdraft protection. Some analysts said B of A's peers will have to at least consider a similar move to stay competitive.

"It's hard to see how direct competitors of Bank of America are going to be able to keep charging overdraft fees for debit card protections when Bank of America is not doing it," said Gwenn Bezard, research director at Aite Group.

As Geithner's comments demonstrated, the move is likely to sit well with regulators, too.

"There's such a PR campaign that's going on with Washington in order to prevent worse things from happening," said Anton Schutz, portfolio manager of the Burnham Financial Industries Fund and Burnham Financial Services Fund, which own shares in B of A.

B of A spokesman Don Vecchiarello would not quantify how much the bank will be giving up in fee revenue by eliminating debit overdrafts, but said more than 50% of its overdraft fees come from debit card purchases. Sean J. Ryan, an analyst at Wisco Research, wrote to clients Wednesday that "overdraft fees account for more than half of deposit service charges at consumer-oriented banks; we regard 60% as a valid benchmark." Last year, B of A's deposit service charges totaled $6.8 billion. Using Ryan's rule of thumb, that would put its overdraft fees at about $4 billion and the debit overdraft fee component at more than $2 billion.

Analysts said it's likely that B of A will make up for the lost revenue by charging a monthly fee for checking accounts and other services that have typically been free. "Banks ramped up free checking in the last few years but I think ultimately many banks will have to reinstate monthly fees," Bezard said. B of A and others could also drive consumers to adopt premium or rewards-based cards that bring in higher interchange fees, he said.