Relief From Debit Card Fees In Sight?

   

Posted: Oct 16, 2009

Do you have a debit card in your wallet? Close to 185 million Americans do, hooked on their convenience, ease of acquisition, and the fact that they're accepted practically everywhere. But at what price?

In recent years it has been common practice for banks to allow debit card customers to overdraw their accounts as a "courtesy". But that courtesy has come at a cost, namely a hefty overdraft fee for each purchase or ATM transaction over the limit.

Compounding the situation, banks have also been known to restructure the order in which they debited transactions – from highest to lowest instead of first to last – which meant accounts were drained and overdraft fees accumulated at a more rapid clip.

Then the mainstream media got interested in the subject, reporting on the huge overdraft fees the banks collect annually – estimated to hit $38.5 billion in 2009 alone – and the impact those fees had on unsuspecting customers. It wasn't long before several major U.S. banks announced policy changes.

For example, Bank of America now says it will stop charging overdraft fees on accounts overdrawn by less than $10 in a single day, and the number of $35 overdraft fees it charges will be capped at four per day. Chase customers who are overdrawn by less than $5 will be charged no fee, with no more than three overdraft fees charged per day. Chase has also said that, beginning in 2010, it will process transactions chronologically. Other banks have indicated they will allow customers to opt out of overdraft protection altogether.

Proponents hail these changes as a victory for the consumer, and support more moves in the same direction. "The sure-fire way to deter overdrafts is not by covering them and surprising consumers with a fee. It’s by denying the transaction in the first place. That’s exactly what most banks did as recently as 2004," wrote Rebecca Borné of the Center for Responsible Lending in a recent New York Times commentary.

Critics maintain that the banks won't offer the overdraft option if they can't be compensated for the risk. "Consumers using debit cards need to keep track of their accounts and treat overdrafts as a type of loan," stated John Berlau of the Competitive Enterprise Institute, in the same Times commentary. "They should also shop around with banks and credit unions about various options that would better serve them in the use of debit cards."

Granted, the vast majority of overdraft charges (93%) come from a small minority (14%) of debit card users who tap out their accounts five times or more a year, according to the Federal Deposit Insurance Corporation (FDIC). But its chairman, Sheila Bair, questions whether the newly-announced policy changes go far enough.

"We do need some regulatory standards in this area," Bair told USA Today, adding that any major restriction to bank policies "needs to be done very carefully, given the state of the industry." Bair added that the FDIC should have moved earlier to curb these practices. "If we had early regulatory intervention on this, the genie would have never gotten out of the bottle," she said.

So now, short of forcing the genie back into the bottle, debit card customers who are in the habit of overdrawing their accounts can resolve to pay closer attention to their balances and to shop around for better terms to ensure that exorbitant overdraft fees are a thing of the past.