Overdraft fees to shrink, but others may take their place

CHARLOTTE, N.C. — The good news for bank customers this summer is that new federal rules should cut down on unexpected overdraft fees.

The bad news is that banks are starting to design new fees to help make up for the lucrative surcharges they might lose.

Starting July 1, Wells Fargo is ending its free checking account, although there are ways to avoid monthly charges. And Bank of America
is testing an array of account options and fees that will be rolled out
later this year. Other banks, especially large and mid-sized ones, are
expected to follow suit.

The new rules say customers have to give banks
permission to cover everyday debit card purchases and ATM withdrawals
if they don’t have enough money in their accounts. Banks charge
overdraft fees that can reach $35 per transaction for this service.

Only if customers make the effort to opt in will
banks cover overdrafts and levy the fees. If customers do nothing, they
will in effect opt out and their transactions will be denied.

Customers have been getting notices from financial institutions ranging from Wachovia to Charlotte Metro Credit Union
to Fifth Third telling them to make their choice online, at branches or
by phone. Another option is to sign up for an overdraft protection
service that taps a savings account or credit card when a checking
account doesn’t have enough money. These services are typically less
costly.

Overdraft services can help keep customers from
missing important payments or avoid the embarrassment of bouncing a
check. But the high fees have also become a big revenue source for
banks. In recent years, the fees have drawn fire from consumer groups
and lawmakers as excessive or even predatory.

Bank of America, the
nation’s biggest bank, announced in March that it’s going a step beyond
the new regulation. As of last week, customers who sign up for new
checking accounts are not affected by overdraft fees.

That’s because the Charlotte
bank will no longer authorize debit transactions, unless a customer has
signed up for an overdraft protection service linked to another
account. That type of overdraft protection costs $10 each day it’s used. Bank of America’s
current account holders will start having transactions denied in
August, unless they have enough money in their accounts or have linked
up to other accounts or a credit card.

The bank will continue to charge overdraft fees in
transactions involving checks or automated recurring drafts such as a
gym membership. Customers incur most overdraft fees from debit card
transactions.

Bank of America is making the move after input from customers, said Susan Faulkner, the bank’s deposit and card products executive. “They said, ‘Don’t let us spend money we don’t have,’ ” she said.

If customers are denied at the point of sale, they can use a credit card or go to one of Bank of America’s
more than 18,000 ATMs for cash, she said. The bank’s machines give
customers the choice of paying an overdraft fee if an account doesn’t
have a sufficient balance. Withdrawals from non-Bank of America ATMs will be denied if the customer doesn’t have the money.

As the bank gears up for this change, it is also
testing new accounts before rolling out final versions later this year
and early next year. The nation’s biggest bank is finding that
customers are willing to pay a fee for services if they feel the price
is fair and clearly explained, Faulkner said.

The accounts will have different options and price
points, she said, declining to give details. The bank’s free checking
account, which requires direct deposit, could be “shaped differently,”
Faulkner said.

Bank of America is the biggest bank to start denying debit transactions if customers don’t have enough money, although it’s not the first. Citigroup hasn’t been authorizing transactions in cases where customers had insufficient funds. Smaller banks such as Charlotte’s First Trust and NewDominion Bank also haven’t allowed customers to rack up overdraft fees.

A Sandler O’Neill Partners report last month said Bank of America could suffer the largest hit to annual revenue because of overdraft changes, about $2.2 billion per year at the high end. Bank of America had total revenue last year of $119 billion.

Wells Fargo could lose $1.1 billion in revenue from lost fees, the second biggest hit, according to Sandler O’Neill. Wells had revenue last year of $88 billion.

Sandler O’Neill called the lost income “fairly manageable”
for banks, but noted that banks don’t need “any additional negative
drivers to earnings” right now. Congress is currently weighing financial reform regulation that could further curb revenue for banks.

Greg McBride, senior financial analyst with research
firm Bankrate.com, said many banks will probably take a wait-and-see
approach before making account changes. For one, a small percentage of
customers incur most of the overdraft fees that banks charge. If these
customers opt in, banks’ fees are unlikely to change much. Banks are
also waiting to see how legislation in Congress affects fees banks make from debit card transactions.

“I don’t think free checking has gone the way of the dinosaur yet,” McBride said.

One bank already making changes is San Francisco-based Wells Fargo, which bought Charlotte’s Wachovia in 2008. It will no longer offer new free checking accounts starting July 1,
although existing customers can keep their no-fee accounts. Customers
will be able to get monthly fees waived in several ways — for example,
if they have direct deposit, or have a Wells Fargo mortgage, the bank said.

Wachovia will continue to offer its free checking accounts until branches convert to Wells Fargo
systems state by state. Existing customers, though, can keep their free
checking accounts. Carolinas branches are set to convert late in 2011.

Among other institutions asking customers to opt in for overdraft coverage, BB&T, Charlotte Metro Credit Union, Fifth Third, First Citizens, JPMorgan Chase and SunTrust said they haven’t changed other account fees. SunTrust and BB&T noted they’re always evaluating products and services.

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HOW TO AVOID BANK OVERDRAFT FEES:

—Use online banking to check your account balances

—Sign up for mobile phone and e-mail balance alerts

—Sign up for overdraft protection that links your
checking account to another account, such as a savings account. These
services typically carry lower fees.

—Don’t “opt in” for overdraft protection. Avoiding
overdraft protection means your bank won’t cover debit card
transactions or ATM withdrawals if you don’t have enough money in your
account. To avoid denials, current customers need to opt in by August 15. New account holders will be given the choice starting July 1.

—Bank of America
will no longer approve everyday debit transactions unless customers
have enough money in their accounts or have overdraft protection linked
to another account. The change will go into effect for current
customers in August.

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