Customers or Fees: Contradicting Strategies (and the fees are going to lose)

On one hand, the banks and credit unions aggressively want to attract more customers. On the other, the banks and credit unions are addicted to fees, NSFs in particular. Rather than incur an overdraft charge, consumers overwhelmingly prefer their debit card purchases to be declined at the checkout per a 2008 survey by Opinion Research Corporation.

It once was that overdraft protection was provided just for check transactions. For a fee, the bank would honor a check even if there weren't enough funds in the account to cover it. Overdraft is now extended to ATM withdrawals and debit card purchases. ATM and debit cards have been marketed as the good plastic: Unlike credit cards, these were supposed to be the same as cash. Most customers think they can't swipe and spend more than what is in their bank account, but they are wrong.

An overdraft study published late last year by the FDIC found that at least 81 percent of banks allowed overdrafts to take place at ATMs and debit transactions. An overwhelming majority of banks in the FDIC survey did not inform customers that they lacked enough money in their accounts to cover their electronic transactions. Only about 8 percent of the financial institutions informed consumers that funds were insufficient before transactions were completed, thus giving them a chance to avoid both the overdraft and the fee. Fees assessed by banks ranged from $10 to $38. The banks collected over $20 billion in these fees in 2008.

When you make so much money on something so unpopular, things happen. In this case, Walmart and the Fed.

First Walmart. Banks and credit unions fought ferociously to keep Walmart from getting a bank charter (rather than compete). They thought they had won. Now Walmart has a partnership with GE Bank where they offer a prepaid Visa debit card. Free to reload and they accept direct deposits. If the money is not on the card, the consumer is denied the purchase and there is no fee. Exactly what most consumers want. Who do you think will win their business in the long run?
Second the Federal Reserve is considering two alternatives:

• Institutions would be prohibited from automatically enrolling customers for overdraft protection services. Instead they would have to first give customers notice and a reasonable opportunity to opt out of the service.

• Institutions would be required to get a customer's permission to provide overdraft protection. Customers would have to choose to opt-in before any fees could be assessed.

The rule change would only apply to overdrafts for ATM withdrawals and debit card purchases. It would not affect overdraft protection for checks or recurring debit charges.

NSF fees for banks will be going down over the next few years, either by competition from the Walmarts of the world or though regulation or a combination of the two.