We told you last month about banks deciding to let customers opt out of overdraft fees, first announced by Bank of America and JP Morgan Chase, and then the next day by Wells Fargo (and Wachovia, which it owns).

These big banks made the changes very soon after lawmakers announced an intention to try to regulate the extent to which customers are punished for spending money they don’t have.

Here’s a summary of the changes already made:

* Fee will also be charged for overdrafts maintained longer than 5 days, regardless of balance.

Not satisfied, Senator Chris Dodd is still pursuing a new law that will enforce some limits on all banks.

Proposed legislation

The law introduced yesterday aims to prevent:

• more than one overdraft fee per month;
• more than six overdraft fees per year;
• fees that are more expensive than the cost of processing an overdraft;
• banks from manipulating the order in which they post transactions in order to rack up extra fees;
• fees if an overdraft is due solely to a bank hold, such as the hold placed on funds when reserving a hotel, if the hold is greater than the actual amount of the transaction; and,
• enabling overdraft protection on customers who don’t explicitly sign up for it.

In addition, automated bank systems (SMS, e-mail, etc.), ATMs and bank tellers would be obligated to warn a customer if they were in danger of going negative (presumably with the current transaction), and be given the option to avoid that result.

Analysis

Opt-in

I am all in favor of “opt-in”. I want opt-in everything, but as we saw when Windows Vista was new, it’s maddening to be asked for your permission after initiating every single activity. Some things are perfectly innocent and should be opt-out instead. Frankly, I find it thrilling that for the first time, customers can opt out of overdraft fees. Apparently, it took the threat of new legislation to prod banks into introducing this, so sure, let’s make it all consistent.

Fee instances per year, and per month

One overdraft fee per month and six per year seems arbitrary to me. If I had to guess, I’d say this is related to the fact that banks stand to earn over $38 billion this year on overdraft fees, and they weren’t in danger of losing anywhere near that much from accounts which went negative and then stayed that way.

But I’m enough of a capitalist to admit that it seems wrong to limit profits just because it can be done, which this seems to smack of. When the full text of the bill is available, I’ll try to find more about where these numbers came from.

Fees more expensive than the cost of processing

To be sure, it’s part of a bank’s operation to process an overdraft, deal with a negative account, and pay the salaries of people who write the software and maintain the literal and figurative machinery.

But as was explained to me while working the phones at Bank of America, part of the fee is also meant to dissuade the customer from going negative, and failing that, to encourage the customer to bank elsewhere. Clearly, the fees are adding up to lavish profits at the expense of probably-well-meaning customers. In my opinion, it’s simply not right to profit because someone else fails, especially when that someone is your customer.

Manipulating the order of posting items to create extra fees

This should be obvious as a disgusting practice performed by a heartless behemoth of a corporation.

Overdraft fees because of a bank hold

This also seems like common sense. If a hotel has reduced your available balance by $250 when you’re only going to be paying $110, it’s unreasonably for the bank to punish you for being overdrawn. You had no intention of spending more than you have.

The same is true if there’s a hold placed on a deposit. I’m sure the vast majority of deposits that have holds placed on them end up being legitimate, probably at least 98%. A check made out to you isn’t the same as cash, but why not give your customers the benefit of the doubt, or at least avoid punishing them when you don’t and you end up being wrong?

Warning customers who are in danger of going negative

This just seems like excellent customer service. If a bank truly finds it inconvenient to process overdraft fees, they’d all be doing this today.

Sources

Dodd Introduces Legislation to Curtail Overdraft Fees, Jeff Plungis, Bloomberg, Oct. 19, 2009
Dodd Unveils Bill to Protect Customers From Abusive Checking Account Overdraft Fees, Sen. Dodd’s Official Web site, Oct. 19, 2009
Photo Credit: Tom T

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Yesterday, Bank of America and J.P. Morgan Chase Bank announced they were changing their policies to allow customers to opt out of overdraft protection. Wells Fargo decided to follow in their footsteps late yesterday, announcing a number of changes at this bank. The following changes also apply to Wachovia, the bank that was acquired by Wells Fargo several months ago.

Wells Fargo is eliminating overdraft fees if the account is overdrawn by less than $5 and are limiting overdrafts to only four per day. Customers will be allowed to opt out of overdraft protection, so they don’t incur fees but transactions that would bring their accounts below zero will be declined.

All of these changes are improvements, although I see no reason for a bank to charge more than one fee per day. Regardless of what a bank charges, customers have the responsibility to monitor their own accounts. Accidents and emergencies happen, but in the end we should all be aware of what we have in the bank. The best defense against excessive bank fees is to pay attention and give the banks no reason to charge them. Here are some tips for avoiding overdraft fees.

Wells Fargo Announces Changes to Overdraft Practices, September 23, 2009

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Overdraft fees are nothing to sneeze at. Having not always been a model bank customer, I know how it feels like an unfair punishment to have roughly $30 taken away when my account is already negative. I’ve also worked for Bank of America, and I can see why they use a dis-incentive to drive away bad customers.

I was a pretty generous Customer Service Rep., and would refund overdraft fees to as many customers as I could. But sometimes there’d be an awkward conversation when a customer would ask, “How can I stop getting these overdraft fees in the future?”

Naturally, I’d go into my speech about keeping a balanced checkbook (or something similar) with you, and how the “available balance” you’d get from an ATM or the phone service was often a lie. Some customers persisted (as well they should) and felt like there should be a way to not be allowed to go negative. It was tricky, and unlikely, but not always impossible to get your branch manager to agree to put that kind of hold on your account.

But now, any Bank of America customer can opt-out of overdrafting. If you’re down to $2.12 in your checking account, and you go to buy a Frappucino, you’ll have your card rejected at the register.

In addition, Bank of America also decided it won’t impose an overdraft fee if your account is above -$10, unless you don’t fix it within five days. And the limit of overdraft fees you can get in one day is now four, instead of ten.

JP Morgan Chase also announced that they’ll be changing their policies:

Starting in the first quarter of 2010, the bank will make overdraft protection opt-in for all customers, post transactions to accounts as they occur, and eliminate fees when accounts are overdrawn by $5 or less. It will also reduce the maximum number of fees per day to three from six.

Bank Of America Backpedals On Overdraft Fees, Huffington Post, Sep. 22, 2009

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