Where will banks make up lost overdraft fees?

By CANDICE CHOI
The Associated Press
Wednesday, September 23, 2009; 6:05 PM

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

It's a worrisome prospect for the vast majority of customers who never overdraw their funds and have grown accustomed to perks like free checking accounts.

"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-based 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 like 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 too.

Such changes could help offset the steep losses banks face as they overhaul their overdraft programs, which have come under intensifying scrutiny in the past year. 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 putting caps on 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 New York-based 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. That's more than the $28 billion consumers spent on major appliances and the $14 billion they spent on books, according to the research firm.
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However, only 5 percent of customers accounted for 68 percent of revenue from overdraft fees. Meanwhile, 74 percent of customers didn't incur any overdraft fees.

Once 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.

"There going to find new ways to push the same product," Sherry said.