Debit Card Overdraft Reform Gets the OK. Now What?

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When Congress introduced credit card reform, the banks and credit card issuers reacted by jacking up rates and adding new fees. Likewise, with the Federal Reserve ruling that banks must reform the way debit card overdraft fees are assessed, there will certainly be unintended consequences: Banks are sure to react with new strategies that somehow siphon more money out of consumers. Basically, we’re all waiting for other shoe to drop. A shoe full of fees.

There’s no doubting that credit card reform is changing the system—just not solely in ways that consumers welcome. Beyond the rate increases and new fees, there are also mass cancellations occurring—many without warning to the customer—resulting in fewer credit card accounts period.

A NY Times op-ed rehashes some of the ways credit card reform has backfired, with the exhaust fuming into consumers’ faces:

Back in May, Congress passed a law requiring banks to give customers a 45-day notification before raising rates. To give banks time to adjust to the new rules, Congress decided not to put that provision into effect until February.

So what happened next? Banks rushed to raise rates before the law takes effect. Many customers who may not have had their rates raised until 2010 — or perhaps not at all, if the economy continues to improve — found themselves paying higher rates even though they had not missed any payments. How could Mr. Dodd and his fellow lawmakers not realize that banks would pre-emptively raise rates?

Credit card reform gives consumers better notice—prompting the necessity to actually read letters from your credit card company. It has not given us better rates.

Now, with this Federal Reserve announcement, banks cannot automatically add debit card overdraft protection—and the fees that go along with it—to customers’ accounts without their consent. Overdraft protection, in which banks hit you with a fee of around $35 when you use your debit card but don’t have the funds in your account, must now be an opt-in only program. From the Fed’s announcement:

To ensure that consumers have a meaningful choice, the final rules prohibit financial institutions from discriminating against consumers who do not opt in. The final rules require institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.

Certainly, people should be asked. Customers should give their OK before there’s the possibility of paying $38 for a $3 coffee (because you paid for it with an overdrawn debit card). As Barney Frank, commenting on the banks’ consumer-friendly “protection” spin, said recently, “Don’t do people favors without asking them.”

Here’s the thing: The new opt-in rule doesn’t go into effect until July 1, 2010. What are the banks going to do before then? For that matter, they can change account terms after then too. Banks make something like $38 billion annually on overdraft charges, and once masses of customers opt out of debit card protection—and there’s no denying the majority will opt out—the banks will be hunting for new money makers.

There are plenty of opportunities to nickel and dime bank customers, like during the gazillion transactions other than debit card overdrafts. Per the Times:

Because the new rules do not cover many other types of transactions, they were criticized by consumer groups.

“Some of the time protection is never as good as round-the-clock protection,” said Ed Mierzwinski, consumer program director at the United States Public Interest Research Group.

More consumer discontent via USA Today:

Consumer advocates also criticized the Fed rule, saying it doesn’t go far enough to curb overdraft fees that are pushing some people into financial turmoil. The regulation, for instance, doesn’t restrict fees charged by banks for overdrawn checks and recurring debit card transactions, such as monthly bill payments. Legislation introduced by Rep. Carolyn Maloney, D-N.Y., and separately by Sen. Chris Dodd, D-Conn., would restrict both check and debit card overdrafts.

“The Fed is acting 10 years late to partially solve a problem that Congress is going to have to completely solve,” says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. “They’re trying to do the least that they can get away with.”

This Mierzwinski guy is a popular fellow to quote, apparently. The big point is: Reform, no matter its purpose, often comes with unintended (read: bad) consequences. I wouldn’t bet on Congress solving your problems. Right now, it’s especially wise to pay close attention to what kind of plastic is in your wallet, and what card you select when paying your bill at the coffee shop, the gas station, whatever.

Could the cash-only consumer movement be getting a bump?