The Overdraft Campaign: Banks Try to Scare Customers into Accepting $35 Fees

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The overwhelming majority of bank customers don’t want overdraft protection. According to one survey, 80% of debit card holders say they’d rather skip on the arrangement, in which banks allow customers to spend more money than their accounts hold, in exchange for a fee of $30 or $35 each time the customer overdraws. The program amounts to a short-term loan with interest rates that can be astronomical.

For now, most banks automatically enroll customers in overdraft protection, no questions asked, with or without any boxes checked. You must officially tell the bank you want to opt out to get the service—and the possibility of corresponding fees—dropped. But by the summer of 2010, bank customers will only receive overdraft protection if they opt into such programs. In 2009, banks earned $40 billion in overdraft fees, about half of which came from ATM and debit card overdrafts. Facing the prospect of losing its cash cow, the banks have launched a campaign to convince customers that, $35 fees or not, they really do want to opt into overdraft protection. Without “protection,” the banks say, you open yourself to all sorts of dangers.

The NY Times cites some recent marketing copy from Chase’s overdraft campaign:

“Your debit card may not work the same way anymore, even if you just made a deposit. Unless we hear from you,” the message, emblazoned in large red type, warns. “If you don’t contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 — even in an emergency,” with “even in an emergency” underlined for emphasis.

Oh snap! The underline! They’re playing for keeps.

My natural reaction is: If they have to try this hard to convince customers of the merits of overdraft protection, how good can it really be? If the service was that amazingly wonderful, the banks wouldn’t have to pump it up to the enth degree or resort to scare tactics.

That said, for some customers (“some” meaning: irresponsible and/or lazy), overdraft protection makes sense. Getting hit with a $35 overdraft fee is probably better than bouncing a rent check or having your debit card turned down when you’re at the train station and don’t have cash to buy a ticket home. There’s also probably no harm done in signing up for overdraft protection if you keep a decent-size balance and you’ve never gotten close to overdrawing. Best of all, of course, is being aware of precisely how much is in your account at all times—but that seems like too much to ask of a person nowadays.

The big point is that, as of this summer, the decision will be yours. The banks are no longer going to be allowed to dish out “favors” without asking customers first. In a lot of ways, the decision has always been yours. But, human nature being what it is, inertia has a tendency to take over, and relatively few bank customers bothered to opt out of overdraft protection, even after being burned by hundreds of dollars in fees. For this same reason, I expect only a small percentage to actually opt into overdraft protection come summer.

At the very least, once the overdraft rules change, consumers should stop whining about the sneakiness of bank fees (well, overdraft fees anyway, because you know there will be other fees to come). The overdraft is an issue that’s entirely under the individual’s control. You’re the one swiping the debit card (or not). You’re the one reviewing your bank statements (or not). You’re the one spending more money than you have (or not).

Granted, you’d think that the banks could help customers out just a little bit. You’d think that it wouldn’t be too difficult to somehow alert a customer the moment he buys a $2 coffee that winds up costing $37—because of a $35 overdraft fee. Every ATM machine gives a notice regarding fees before a customer takes out some money. Why can’t the banks do something similar by sending text messages or e-mails to customers about to overdraw their accounts?

They’re certainly capable of putting such a system into place. They just don’t want to. If they had done so in 2009, they probably wouldn’t have pulled in $40 billion in fees.