Banks Reduce Overdraft Charges: Smaller Fees Better Than No Fees At All

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Instead of forking over $35 or more each time you use your debit card and don’t have enough money in the account to cover the bill, you might only get hit with a fee of $10 or $19.
SmartMoney explains some of the changes to overdraft fees being made by banks such as U.S. Bancorp:

Last week, U.S. Bancorp announced that customers who write checks, withdraw money from an ATM or use their debit cards on an account that is overdrawn, will see reduced fees. Currently, fees are based on the frequency of overages in a 12-month period. For the first incident, there’s a charge of $19. The second, third and fourth incidents come with a $35 penalty per overage. And when five or more overages occur within that year-long period, the fee kicks up to $37.50. Under the new fee structure, which is expected to take effect in August, any purchase of $20 or less on an account that’s overdrawn is assessed a reduced fee of $10, and anything over $20 gets a $33 fee. (Note that in a separate change made last fall, if an account is overdrawn by less than $10, there is no fee. Further, the number of overdraft transactions that get assessed a fee are capped at three per day as of March 31.)

Why are banks making these changes to a system that earned them $40 billion last year? Basically because collecting small fees is better than not collecting fees at all.

Until new laws were passed, nearly all bank customers were automatically signed up for overdraft protection—in which the bank covers charges that exceed your account balance, and in exchange for what amounts to a temporarily loan of sometimes as little as $1 or $2, you’re charged an overdraft fee, typically $35. Under the system, many bank customers unknowingly keep using their debit cards—and keep getting hit with $35 fees each time they do so—thereby racking up hundreds of dollars in fees in the course of a single day.

And, thereby, bringing the entire overdraft system into question. New laws, due to take effect July 1, make overdraft protection an opt-in service. Banks must ask customers if they actually want the service, with all the risks and potential fees that entails. Surveys have said that 80% of consumers would in fact opt out of overdraft protection.

So banks, facing the prospect of losing out on $5 billion worth of fees this year, have gone into overdraft overdrive, launching campaigns to convince customers they really do want the service.

And now, the banks are apparently willing to admit that perhaps the $35 fee was a bit excessive. They’re saying, “Hey, you know what? Those $35 fees? Maybe we don’t need quite that much money each time we cover your tab when you buy a $3 coffee and your account only has $2.85. What do you say we cover your overage for um, $25? Or $19? Maybe even a measly 10 bucks?”

Like I said yesterday, this overdraft business is a moving target, and will need to be monitored closely before and well after the new rules go into effect. From the SmartMoney piece:

Even the banks themselves haven’t figured out their plan of action. “It’s hard to look into a crystal ball,” says Kent Stone, an executive vice president for consumer banking at U.S. Bank. “We’ll wait and see how the competitive landscape shakes out.”