Big Banks Alter Debit Overcharge Rules

Presumably trying to get out in front of proposed legislation that would require banks to ask their customers if they want to "opt in" to debit card overdraft protection, JP Morgan Chase and Bank of American recently announced that they would be altering their overdraft policies. Both banks will stop charging overdraft fees for very small amounts (less than $5 for Chase and $10 for BofA) and will soon provide their customers with the option to opt out of overdraft protection so that a purchase would not be authorized if it would put the cardholder into an overdraft position. Both banks also plan to limit the number of overdraft charges that may be imposed in a single day, and Chase will also drop a controversial method of calculating overdrafts.

According to the N.Y. Times, both banks described their actions as responsive to their customers. “We made the decision that we had to help customers now and help those most stretched by the economy,” said Brian T. Moynihan, president of Bank of America’s consumer and small-business banking operations. “They found themselves getting hit by too many fees, and they said, ‘Help us out.’ ” There is little doubt, however, that threatened legislation has played a role. According to Michael Moebs, an economic advisor for many banks and credit unions, the banks understandably oppose this legislation because many of them collect more in overdraft fees than they earn in profits. Moebs argues that many banks would not be able to replace the revenue soon enough to stay in business.

So, have Chase and BofA, done enough to forestall legislation? While the changes they plan to implement are certainly a step in the right direction, they hardly eliminate many concerns.

For example, the exception for small overdrafts may only protect the cardholder if they deposit sufficient funds to cover the overdraft before making additional charges. But if the cardholder is not notified of the overdraft situation, how often will that happen?

The limits on the number of overdraft fees also hardly eliminate the seeming unconscionability of the arrangement. As an initial matter, they will apply only to purchase at stores, not ATM withdrawals. Second, the amount of fees will continue to bear no reasonable relationship to amount of the overdraft. Bank of America is limiting its cards to no more than four overdraft fees per day. But the fee remains $35 per overcharge, regardless of the amount. So, a customer that makes four purchases over the limit that total just $11 or $12 dollars would pay $140 in fees. The result at Chase is only marginally better. It will impose a limit of three fees per day, but they would total $89 on three overcharges that could amount to as little as $5.01. As Brad Tuttle wrote on the Time website, "[s]o the poor saps who are dumb enough to spend more than they have in their accounts—and who do so more than three or four times a day—are thrown a bone." I would add, a very small bone at that.

I have not seen any justification for these fee levels. Surely, a bank providing overdraft protection should be entitled to a reasonable return on the money it effectively lends to its customer as well as a reimbursement for the incremental administrative fees it incurs because a charge results in an overdraft. These fees appear to exceed the bounds of reason by several orders of magnitude. And surely, the banks would produce the data necessary to justify them if it existed.

Even the proposed new opt out provisions are less than they seem. They will require the customer to forgo overdraft protection for check writing as well as debit card use, a risky proposition given that many vendors charge their own penalty fees for bounced checks.

One doubts that these steps will satisfy the concerns of those in Congress who have proposed legislation to limit overdraft fees.