Bank of America Corp.'s [BAC] plan to block debit card purchases that would overdraw accounts highlights a paradox in the market today: giving consumers fewer choices can be seen as customer-friendly.
Treasury Secretary Timothy Geithner lauded the plan, which is expected to cost B of A billions in revenue, as part of the "process of restoring the trust and confidence in [banks'] customers." He openly urged other large institutions to follow the Charlotte company's lead.
But several such banks indicated they would not.
"You're not going to wake up and see the headline from U.S. Bank saying 'we're going to do the following things with overdrafts or debit cards or credit cards,'" U.S. Bancorp [USB] Chief Executive Rich Davis said at an investor conference Wednesday. "We are not going to tell consumers what they are supposed to do and we're not going to tell them what they are supposed to think."
Several hours before Davis made his remarks, B of A had announced that starting this summer, it will block consumers who do not have sufficient funds in their checking accounts from making debit purchases at the point of sale, instead of letting them overdraw their accounts for a $35 fee. (Overdrafts will still be possible from checks or automated teller machine withdrawals, which will continue to incur fees; the ATMs will alert consumers before proceeding with withdrawals if they would result in overdrafts.)
Susan Faulkner, B of A's head of deposits and card products, told reporters Wednesday that the decision was a response to consumers telling the company they did not want to spend money they did not have.
B of A's move goes above and beyond a regulation that will take effect July 1, under which banks will have to get consumers' consent before enrolling them in overdraft protection. Some analysts said B of A's peers will have to at least consider a similar move to stay competitive.
"It's hard to see how direct competitors of Bank of America are going to be able to keep charging overdraft fees for debit card protections when Bank of America is not doing it," said Gwenn Bezard, research director at Aite Group.
As Geithner's comments demonstrated, the move is likely to sit well with regulators, too.
"There's such a PR campaign that's going on with Washington in order to prevent worse things from happening," said Anton Schutz, portfolio manager of the Burnham Financial Industries Fund and Burnham Financial Services Fund, which own shares in B of A.
B of A spokesman Don Vecchiarello would not quantify how much the bank will be giving up in fee revenue by eliminating debit overdrafts, but said more than 50% of its overdraft fees come from debit card purchases. Sean J. Ryan, an analyst at Wisco Research, wrote to clients Wednesday that "overdraft fees account for more than half of deposit service charges at consumer-oriented banks; we regard 60% as a valid benchmark." Last year, B of A's deposit service charges totaled $6.8 billion. Using Ryan's rule of thumb, that would put its overdraft fees at about $4 billion and the debit overdraft fee component at more than $2 billion.
Analysts said it's likely that B of A will make up for the lost revenue by charging a monthly fee for checking accounts and other services that have typically been free. "Banks ramped up free checking in the last few years but I think ultimately many banks will have to reinstate monthly fees," Bezard said. B of A and others could also drive consumers to adopt premium or rewards-based cards that bring in higher interchange fees, he said.
A recent study by ACTON Market Intelligence, a Lincoln, Neb., marketing firm, found that 57% of consumers would opt out of overdraft protection. However, Scott Valentin, an analyst at FBR Capital Markets Corp., said consumers might change their minds after they suffer the embarrassment of not having enough money in their account and being denied a purchase.
Like U.S. Bancorp, Regions Financial Corp. of Birmingham, Ala., is going to give consumers the chance to opt in. "It remains to be seen how many would do that," Grayson Hall, Regions' president and soon-to-be CEO, said at the investor conference. "We plan to dramatically reduce the occurrences of charges in a given day … and lower the chances of being charged for a low-dollar transaction." Hall said Regions is notifying its customers about their choices and will roll out the opt-in feature next month.
Anthony Hicks, a spokesman for First Horizon National Corp., said its First Tennessee Bank "is moving forward with plans to provide our customers a choice in line with the objectives identified in the Reg E guidelines" that will take effect in July"
The Memphis bank's "customers will be able to make their own decisions to authorize or not authorize the bank to pay certain debit card and ATM transactions in overdraft status."
Cameron Jordan, a spokeswoman for BB&T Corp. said the Winston-Salem, N.C., company "has long-standing policy that gives customers the option to choose whether the bank declines payment on transactions that would overdraw their account or whether they want the overdraft."
Wells Fargo & Co. said it was still weighing how it will handle the new regulation.
"We're still in the middle of working on our plan and strategy," said Richele Messick, a spokeswoman for the San Francisco banking company. She said customers should expect to hear from Wells "soon." Currently, it charges a $35 fee for overdrawing any type of account.
Citigroup Inc., on the other hand, said it has never allowed its customers to overdraw at ATMs or at debit point-of-sale transactions.
One top 10 bank, requesting anonymity, said it's confident that a significant number of consumers will decide to opt for overdraft coverage, based on data it has generated from ATM usage. About 60% of customers, when told during an ATM transaction that they are about to overdraw on their account and risk being assessed a fee, still take out the funds, this bank said.
A spokesman for JPMorgan Chase & Co. directed a reporter to an investor presentation in February, at which the company said beginning March 29 customers can opt out of debit card overdraft protection.
The company is also making several changes to its fee structure for anyone who continues to use the coverage. JPMorgan Chase is moving to a flat $34 fee for any transaction that goes beyond the account's funds. Previously, the New York bank had a tiered fee structure that charged up to $35. The company also said it was moving to a standard, one-time $15 charge for extended overdrafts.
Additionally, JPMorgan Chase said it was changing the way debit and ATM transactions were posted to the account, recognizing charges in the order they occur, not largest to smallest, and adding a $5 cushion, so that if the account is overdrawn by less than $5 no fee will be charged.
In July, all new Chase checking account customers will be able to choose to opt in or out of its debit card overdraft coverage. By August, any of the company's existing customers that have not chosen to opt in will no longer receive overdraft protection. The company estimated that the changes will impact its annual after-tax income by about $500 million.