Fed to banks: "Overdraft protection" isn't a customer favorite. Change the default rule.

The Federal Reserve will prohibit banks from charging overdraft fees on automated teller machines or debit cards, unless a customer has agreed to pay extra charges for exceeding account balances. Financial companies will have to explain overdraft programs and fees, as well as choices available to consumers, the Fed said today in a statement announcing a rule that takes effect next year.

The rule comes after Fed research indicated that consumers don’t like to be automatically enrolled in overdraft protection programs. Of course, most consumers don’t even know they’ve been enrolled until they get hit with a fee after overdrawing their accounts. More at Bloomberg.

(Hat tip: Mort Goldman.)

Addendum: The new default rule won’t apply to old fashioned checks or regularly recurring debits from checking accounts. As more and more people pay their cable, phone, and utility bills automatically and electronically, a new round of debate about the default rule may still be ahead.

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  • http://calculatedexuberance.blogspot.com/ Thorfinn

    So… it’s better to have consumers unable to draw money when they need it? This is supposed to be a better default why?

  • matthew

    Thorfinn, the question is about consent and (implicitly) informing. The service will still be there. Hell, once out in the open banks might even compete on the fees.

    Anecdote: My idiot brother-in-law paid $25 per transaction (extra) for about 15 days before he got his statement. Bill comes, he finds out he’s overdrawn, sucks to be him, sucks to be stupid. Like $600 in fees in just two weeks. I would further advocate that there should be a mandatory robo-call informing customers every time such a fee has been assessed.

    A good rule of thumb is that it’s predatory if you wouldn’t do it to your brother-in-law.

  • http://discover.profitstars.com/leewetherington Lee

    What would seem a relatively simple choice, i.e., to opt in for Overdraft Protection or not, is made complex by the new segmentation of transaction types (ATM and one-time debits vs. checks and recurring debits) and the clearing mechanics of signature-based debits vs. PIN-based debits.

    Fact is, there are some transactions that consumers definitely don’t want bounced, e.g., mortgage payments and insurance premiums, and others they could care less about, e.g., $2.00 Slurpees and $3.00 burgers. The new complexity of overdraft opt-in per transaction type demands more explanation and consultation by the financial institution to help consumers make the choice that best serves their own best interests, an effort made more treacherous by the recession-fueled populist outrage against disproportionately high NSF fees that have evolved to subsidize free checking, free online banking, free bill payment, etc.

    The ultimate fix, one aligned with the principles of “Nudge,” is simple. Give consumers transaction-by-transaction opt-in choice in real time at the point of sale or ATM at which they are about to overdraw. So, when attempting to make a purchase or ATM withdrawal, the consumer gets a message and a choice: “You have insufficient funds for this transaction. Would you like to continue and incur an overdraft fee of $X.00? If so, select Yes. If not, select Cancel.”

    For checks and recurring debits, a real-time text, robo-call (per Matthew above), or email alerting consumers to an impending overdraft situation would give the consumer a window of opportunity to move funds to avoid the resulting overdraft charges.

    Until these solutions are in place, financial institutions must ensure the choice architecture they present (via notification, education, marketing and PR campaigns) leaves consumers comfortable and confident in the opt-in choice they make, regardless of what that choice is. Otherwise, the approaching opt-in deadline could prove a reputation blow most financial institutions can currently ill afford.

    On the flip side, this is a huge opportunity for some financial institutions to look like heroes and bolster their brands as trusted advisors by nudging consumers to make better overdraft choices and reducing overdraft protection fees to amounts commensurate with the value consumers (using reflective vs. automatic thinking) assign to such services when adequately explained upfront.