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Candice Choi

As new banking rules take effect, banks will look to make up overdraft fees

By Candice Choi
Associated Press / October 17, 2009

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Banks are backing off harsh overdraft fees and policies. That’s the good news. The bad news is they will probably look to make up that lost profit elsewhere.

“Banks are going to have to get creative. Rather than generic free checking accounts, you’re going to see lots of different flavors of products,’’ said Bob Meara, a senior analyst with Celent, a Boston consulting firm for the banking industry.

That might mean the return of monthly fees or minimum balances for checking accounts or the bundling of accounts with other services for a fee.

Customers could also be steered toward lower-cost services such as online banking, Meara said. Use of debit cards, which bring banks revenue from store interchange fees, may be encouraged. And networks of bank branches across the country could shrink.

Such changes could help offset the steep losses banks face as they overhaul their overdraft programs, which have come under scrutiny. Critics say automatic enrollment in overdraft programs, which has become an industry standard, is deceptive because most people assume they can only spend money they have when using debit cards.

But at Bank of America, overdrawing an account by as little as $6 currently results in a $35 fee. That charge can be applied multiple times in one day. The Charlotte, N.C.-based bank and JPMorgan Chase now say they’re easing up and limiting such fees. More important, customers will soon have to opt into overdraft programs, rather than being automatically enrolled in them. The changes will apply to new Bank of America customers. At JPMorgan, even existing customers will have to opt in to overdraft programs.

If customers choose not sign up, it could mean an enormous loss of profits.

In 2007, banks earned about $29 billion from overdraft fees, according to Oliver Wyman, the parent company of Celent. However, only 5 percent of customers accounted for 68 percent of revenue from overdraft fees. About 74 percent of customers didn’t incur any overdraft fees.

Given the choice, it’s likely most people won’t opt into overdraft programs, said Linda Sherry, a spokeswoman for Consumer Action, an advocacy group in Washington, D.C. But she noted that banks will probably put a new emphasis on getting people to sign up. “They’re going to find new ways to push the same product.’’

The new credit card law, which takes effect in February, requires banks to give customers the choice to opt into over-the-limit programs.

That law only applies to credit cards, but lawmakers are now shifting their sights to debit cards. Last week, Senator Christopher Dodd, Democrat of Connecticut, said he plans to seek legislation requiring customers to sign up before overdraft protection could be used.

Candice Choi is an Associated Press writer.