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Now lender backing off new fee on overdrafts

Bank of America won’t test alerts

Last week, Bank of America scrapped a proposed $5 monthly fee on debit card purchases. Last week, Bank of America scrapped a proposed $5 monthly fee on debit card purchases. (EMMANUEL DUNAND/AFP/Getty Images)
By Todd Wallack
Globe Staff / November 10, 2011

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Bank of America Corp. has abandoned a plan to charge hefty overdraft fees to customers who make debit card purchases with insufficient funds in their accounts.

The bank, the biggest in Massachusetts and one of the largest in the nation, currently rejects debit card purchases if there isn’t enough money in accounts. But the bank considered offering a service to notify customers of the shortage via text messages and give them the option to go ahead with the purchase and pay a $35 overdraft charge.

Bank of America said in May that the company planned to test the concept in trials beginning early next year. But Bank of America spokeswoman Anne Pace said the bank has since dropped the idea, although she declined to say why.

“That’s no longer on the table,’’ Pace said. “We did not test it, and there are no plans to move forward with a test at this time.’’

There’s no technical reason why Bank of America couldn’t have implemented the texting idea for debit card overdrafts, since banks routinely send customers texts to notify them about potentially fraudulent transactions, said Brad Strothkamp, principal analyst for Forrester Research, a Cambridge market research firm.

But Strothkamp said he doubts many customers would accept the $35 fee, especially since most debit card purchases tend to be small and many customers could simply use cash or another card. It’s also likely the bank would have still rejected large transactions that put customers’ accounts too far in the red.

“Unless there’s a big financial benefit,’’ Strothkamp said, “they are probably going to shy away from this.’’

Last week, Bank of America scrapped another proposed charge - a $5 monthly fee on debit card purchases - after a backlash from customers. Bank of America has also drawn fire for overdraft fees in the past; earlier this week, a federal judge in Miami approved a $410 million settlement with Bank of America over complaints the bank processed transactions out of chronological order to boost overdraft fees. Other banks have faced similar suits.

Many consumer advocates complain that overdraft fees on debit cards are unfair because customers can accidentally overdraw their accounts - and rack up hundreds of dollars in fees on tiny transactions, such as a cup of coffee - before they even realize their account is overdrawn.

“It’s a trick and a trap,’’ said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a consumer research and advocacy group in Durham, N.C. “Sometimes, you think you have money in your account, and you don’t.’’

In response to such complaints, federal regulations enacted last year bar banks from charging customers overdraft fees on debit and automatic teller transactions unless customers agree to pay the fees in advance.

Most major banks have since pushed customers to give them blanket permission to allow overdraft fees, which generate billions of dollars in annual revenues. But Bank of America and HSBC decided to end overdraft charges entirely on debit card transactions to make sure customers wouldn’t be hit by unexpected charges - a move that won praise from consumer advocates. Citibank already had a similar policy.

Bank of America acknowledged that its move cut off a key source of revenue. But bank executives have repeatedly said the move was the right one for customers and reduced the number switching to other banks.

“Overdrafts on debit cards were in fact driving strong fee growth,’’ Bank of America chief executive Brian Moynihan told analysts last year, but the fee “was hurting our franchise.’’

Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.