March 12, 2010
Many millions of people will face important choices about their checking and credit card accounts in the coming months, though this week one of the biggest banks made one of the decisions for them.
Some banks are trying to persuade customers to authorize overdraft protection for debit cards.
Bank of America shocked competitors on Wednesday when it announced it was doing away with overdraft fees for debit card purchases.
Starting this summer, the bank’s checking account customers who don’t have enough money to cover their purchases will, in most instances, not be able to use their cards to complete the transaction. Bank of America (and many of its competitors) had often been letting the charge go through despite the lack of funds and then hitting the customer with a fee of about $30.
Bank of America could have allowed customers to sign up for debit overdraft coverage. In fact, it would have had to, because of new rules forcing banks to set up an “opt in” system for most debit card purchases and A.T.M. withdrawals (banks will still be able to automatically cover overdrafts from recurring monthly bills and bounced checks). But the bank simply decided not to, citing feedback from checking account customers who did not want to spend money that they didn’t actually have.
If you take the bank at its word, that feedback suggests that there are not a lot of people who are going to choose overdraft coverage elsewhere. And the same logic probably applies to going over the credit limit on a credit card. There, too, banks now have to get customers’ permission before allowing them to charge more than their limit. And there, too, Bank of America has elected not to ask; instead, it will either cut customers off or, at its discretion, allow some transactions to go through fee-free.
Even so, some of the other big banks are betting that plenty of people will raise their hands to overspend and pay the per-transaction fee. Chase is engaged in an aggressive campaign to get customers to consider their overdraft options and to talk to a banker about them, including reminding them of the opt-in option when they take out money at an A.T.M. Chase will also allow credit card customers to opt in to go over their credit limits.
Capital One has made the same bet as Chase. Citibank never had automatic overdraft coverage and is doing away with over-the-limit credit card fees as well. American Express and Discover decided to get rid of their over-the-limit option last year.
Still, scores of people will need to make some choices in the next few months when their banks and card issuers reach out to them to comply with the new federal rules. Should anyone say yes?
It’s pretty hard to take the idea of opting in to overdrafts seriously. Why? Well, think about it the way the Federal Deposit Insurance Corporation did in a 2008 study. If you make a $20 purchase without enough money in your account to cover it, pay a $27 overdraft fee and then bring your account back above zero in, say, two weeks, you’re effectively paying interest at an annual percentage rate of 3,520 percent.
Um, no thanks. Right?
Banks argue that overdraft isn’t credit. They say it’s a service. Fine, but there are plenty of other cheaper services available to keep from being overdrawn in the first place.
You can start by setting up free e-mail or other alerts from your bank or card issuer that tell you when you’re running out of money in your checking account or getting close to the credit limit on your card.
Your bank may also offer other, cheaper overdraft coverage, too. Perhaps your checking account can tap your savings account if the checking account falls below zero. Or you can link your bank account to a credit card, home equity line of credit or a personal credit line. This will generally be cheaper than paying an overdraft fee.
Chase’s current direct mail campaign invokes a broken-down car in need of an emergency tow. Wouldn’t you want overdraft protection turned on in that instance if your checking account was running low? Well, yes, but only if you didn’t have cash, a credit card or a roadside assistance plan.
And that gets to the heart of the matter. When I asked what sort of person overdraft was truly best for, Scott Powell, who runs the consumer banking business for Chase, painted a picture of a person getting paid on Monday, but running low on funds the weekend before.
“You don’t have enough money, but there are certain emergency things you need to do,” he said, noting that overdraft protection gives people like that options they would not otherwise have and the ability to buy some groceries or a prescription or take a pet to the vet.
Overdraft, in other words, is the very last resort. After a credit card. After account alerts. After tapping home equity. Or, presumably, after you’ve maxed out or ruined your credit and have no home equity left. Sadly, there are probably enough people in that situation for banks to make money chasing and serving them.
But everyone else ought to say no to overdraft, so that debit cards revert to one of their original purposes as a tool to keep you from spending more than their balance. Keep in mind that you can turn overdraft back on anytime if your financial situation gets desperate enough.
(I’ll make an exception here for parents of college-age students who, in a form of tough love, make their children pay any fees as part of their financial education. Please nominate other exceptions in the comments of this story on our Bucks blog at nytimes.com/bucks.)
Will you be embarrassed if your debit card is declined (or your credit card is, if you don’t opt in to going over your credit limit)? You shouldn’t be. Cards don’t work for all sorts of reasons, and many merchants and your dining companions won’t think any less of you if it happens.
Meanwhile, it can’t hurt to ask your credit card company for a higher credit limit before you actually need it. Sure, they’ve been mostly lowering limits, but this can’t last forever if they want to expand their businesses. If your limit is high enough and you’re not carrying a balance, going over the limit becomes a moot issue because your monthly spending never comes close to it.
But if most people say no to overspending, how might banks respond once their fee income declines? The big worry is that they’ll take away free checking, add annual fees to credit cards and take away rewards.
I’m not so sure that will be a widespread phenomenon, though. I was heartened this week by the introduction of the Capital One Venture Rewards credit card. Sure, it has an annual fee of $59 after the first year, but some cards are generous enough to make a fee seem fair.
The Venture card yields two points for every dollar you spend. Then, you can redeem the points for travel by dropping two zeros off the point total to see what they’re worth. So 30,000 points (on $15,000 of card spending) yields a $300 plane ticket on any airline or $300 for a hotel booking.
The new card supports a theory of Aaron Fine, a partner and consumer banking specialist with the consulting firm Oliver Wyman. He argues that more affluent customers have suddenly become a lot more valuable to the banks.
Why? Well, a big chunk of the fee income from the more stretched classes of bank customers stands to go away because many of those people will opt out of paying fees to overspend.
“I expect you’ll see another wave of innovation coming from the banks,” he said. “And perhaps the first segment they’ll address is the higher balance accounts.”
If those big spenders use their new cards enough or park big enough balances in bank accounts, the merchant fees they generate and the other benefits their money brings will make up at least some of the lost income. And with any luck, that will keep a lid on fees and the costs of credit and bank services for other customers of the same institution.
Many millions of people will face important choices about their checking and credit card accounts in the coming months, though this week one of the biggest banks made one of the decisions for them.
Some banks are trying to persuade customers to authorize overdraft protection for debit cards.
Bank of America shocked competitors on Wednesday when it announced it was doing away with overdraft fees for debit card purchases.
Starting this summer, the bank’s checking account customers who don’t have enough money to cover their purchases will, in most instances, not be able to use their cards to complete the transaction. Bank of America (and many of its competitors) had often been letting the charge go through despite the lack of funds and then hitting the customer with a fee of about $30.
Bank of America could have allowed customers to sign up for debit overdraft coverage. In fact, it would have had to, because of new rules forcing banks to set up an “opt in” system for most debit card purchases and A.T.M. withdrawals (banks will still be able to automatically cover overdrafts from recurring monthly bills and bounced checks). But the bank simply decided not to, citing feedback from checking account customers who did not want to spend money that they didn’t actually have.
If you take the bank at its word, that feedback suggests that there are not a lot of people who are going to choose overdraft coverage elsewhere. And the same logic probably applies to going over the credit limit on a credit card. There, too, banks now have to get customers’ permission before allowing them to charge more than their limit. And there, too, Bank of America has elected not to ask; instead, it will either cut customers off or, at its discretion, allow some transactions to go through fee-free.
Even so, some of the other big banks are betting that plenty of people will raise their hands to overspend and pay the per-transaction fee. Chase is engaged in an aggressive campaign to get customers to consider their overdraft options and to talk to a banker about them, including reminding them of the opt-in option when they take out money at an A.T.M. Chase will also allow credit card customers to opt in to go over their credit limits.
Capital One has made the same bet as Chase. Citibank never had automatic overdraft coverage and is doing away with over-the-limit credit card fees as well. American Express and Discover decided to get rid of their over-the-limit option last year.
Still, scores of people will need to make some choices in the next few months when their banks and card issuers reach out to them to comply with the new federal rules. Should anyone say yes?
It’s pretty hard to take the idea of opting in to overdrafts seriously. Why? Well, think about it the way the Federal Deposit Insurance Corporation did in a 2008 study. If you make a $20 purchase without enough money in your account to cover it, pay a $27 overdraft fee and then bring your account back above zero in, say, two weeks, you’re effectively paying interest at an annual percentage rate of 3,520 percent.
Um, no thanks. Right?
Banks argue that overdraft isn’t credit. They say it’s a service. Fine, but there are plenty of other cheaper services available to keep from being overdrawn in the first place.
You can start by setting up free e-mail or other alerts from your bank or card issuer that tell you when you’re running out of money in your checking account or getting close to the credit limit on your card.
Your bank may also offer other, cheaper overdraft coverage, too. Perhaps your checking account can tap your savings account if the checking account falls below zero. Or you can link your bank account to a credit card, home equity line of credit or a personal credit line. This will generally be cheaper than paying an overdraft fee.
Chase’s current direct mail campaign invokes a broken-down car in need of an emergency tow. Wouldn’t you want overdraft protection turned on in that instance if your checking account was running low? Well, yes, but only if you didn’t have cash, a credit card or a roadside assistance plan.
And that gets to the heart of the matter. When I asked what sort of person overdraft was truly best for, Scott Powell, who runs the consumer banking business for Chase, painted a picture of a person getting paid on Monday, but running low on funds the weekend before.
“You don’t have enough money, but there are certain emergency things you need to do,” he said, noting that overdraft protection gives people like that options they would not otherwise have and the ability to buy some groceries or a prescription or take a pet to the vet.
Overdraft, in other words, is the very last resort. After a credit card. After account alerts. After tapping home equity. Or, presumably, after you’ve maxed out or ruined your credit and have no home equity left. Sadly, there are probably enough people in that situation for banks to make money chasing and serving them.
But everyone else ought to say no to overdraft, so that debit cards revert to one of their original purposes as a tool to keep you from spending more than their balance. Keep in mind that you can turn overdraft back on anytime if your financial situation gets desperate enough.
(I’ll make an exception here for parents of college-age students who, in a form of tough love, make their children pay any fees as part of their financial education. Please nominate other exceptions in the comments of this story on our Bucks blog at nytimes.com/bucks.)
Will you be embarrassed if your debit card is declined (or your credit card is, if you don’t opt in to going over your credit limit)? You shouldn’t be. Cards don’t work for all sorts of reasons, and many merchants and your dining companions won’t think any less of you if it happens.
Meanwhile, it can’t hurt to ask your credit card company for a higher credit limit before you actually need it. Sure, they’ve been mostly lowering limits, but this can’t last forever if they want to expand their businesses. If your limit is high enough and you’re not carrying a balance, going over the limit becomes a moot issue because your monthly spending never comes close to it.
But if most people say no to overspending, how might banks respond once their fee income declines? The big worry is that they’ll take away free checking, add annual fees to credit cards and take away rewards.
I’m not so sure that will be a widespread phenomenon, though. I was heartened this week by the introduction of the Capital One Venture Rewards credit card. Sure, it has an annual fee of $59 after the first year, but some cards are generous enough to make a fee seem fair.
The Venture card yields two points for every dollar you spend. Then, you can redeem the points for travel by dropping two zeros off the point total to see what they’re worth. So 30,000 points (on $15,000 of card spending) yields a $300 plane ticket on any airline or $300 for a hotel booking.
The new card supports a theory of Aaron Fine, a partner and consumer banking specialist with the consulting firm Oliver Wyman. He argues that more affluent customers have suddenly become a lot more valuable to the banks.
Why? Well, a big chunk of the fee income from the more stretched classes of bank customers stands to go away because many of those people will opt out of paying fees to overspend.
“I expect you’ll see another wave of innovation coming from the banks,” he said. “And perhaps the first segment they’ll address is the higher balance accounts.”
If those big spenders use their new cards enough or park big enough balances in bank accounts, the merchant fees they generate and the other benefits their money brings will make up at least some of the lost income. And with any luck, that will keep a lid on fees and the costs of credit and bank services for other customers of the same institution.
Closed November 2010
JMO.
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