The new restrictions on overdraft fees set to go into effect July 1 are giving bankers headaches. Already stressed about the potential loss of fee income, bankers are trying to make sense of which transactions are covered by the rules, figure out what fixes they need to make in the back office and, most importantly, develop marketing campaigns that educate consumers about the rules without souring them on overdraft programs.

The changes mandated by the Federal Reserve under Regulation E will ban overdraft fees on ATM withdrawals or signature debit transactions unless consumers voluntarily opt in for overdraft protection.

The biggest back-office hurdle, a point raised by community bankers in written comments last year to the Fed, is the trouble they'll have in distinguishing which debit transactions are covered by the rules. Recurring and automated clearing house (ACH) debit payments, unlike point-of-sale or other one-time transactions, are still subject to overdraft fees.

What's also unclear, bankers and consultants say, is how to handle cases of transactions cleared at the point of sale when they hit accounts that have been subsequently drained by other payments.

"The new Fed position is difficult, at best, to figure out," says Michael Menzies, the president and chief executive of the $160 million-asset Easton Bank and Trust Co. in Maryland. "How do we deal with electronic transactions and those that may not be allowed to cause an overdraft and those that do? We're trying to figure out the technology side and how it works."

Cody Newsom, president and CEO of City Bank in Lubbock, Tex., wrote in a letter to the Fed last year that "it is not currently possible with the networks, merchants, and processors involved in debit card transactions for us to track opt-out on a transaction type basis."

On the retail side of the house, banks are dealing with the new reality of having to market and sell opt-in overdraft protection. That may be a tall order.

"Consumers are going to be reminded in a very clear way that these fees exist, and what's that going to do to their psyche?" asks Paul Tomasofsky, president of Two Sparrows Consulting in Montvale, N.J. "There are all kinds of repercussions to getting the word out."

Banks must send out the overdraft opt-in notifications apart from any other disclosure documents and track responses to them. They also must educate customers on which transactions are subject to fees.

This includes insufficient funds penalties that could feasibly be charged in place of overdraft fees for denied transactions. (The Fed believes this might not pass muster with Federal Trade Commission, however).

Besides crafting the right message, banks will need to develop a sales plan that promotes opt-in at multiple points of customer contact. Soundbite Communications of Bedford, Mass., for example, offers overdraft opt-in communications solutions to banks that use voice, e-mail and text to increase response rates.

But what banks should prepare for most is coping with the dramatic drop in fee income. Joe Gillen, the CEO at Pinnacle Financial Strategies in Houston, estimates that banks could lose 40 percent to 60 percent of revenue from checking accounts after the new rules take effect.

"I don't care how good your communications package is," he says. "There's a high percentage of customers who just won't do anything."

To push opt-in, banks can get creative in how they sell overdraft protection. Robert Giltner, consulting partner at Velocity Solutions in Wilmington, N.C., advises banks to permit less-risky customers, such as those who make several deposits a month, to have higher overdraft limits.

He says the typical bank declines about 550 debit card transactions a year for every 1,000 checking accounts. Reversing about 300 of those declines could increase revenues by about 15 percent.

"The objective should not be how to get customers to opt in," he said. "The objective should be how to help customers make the best decision for themselves."

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