Bank customers pushed to agree to pay for overdrafts

2/28/2010

STANDING to lose $15 billion to $20 billion in annual revenue from overdraft fees, banks nationwide are embarking on campaigns to preserve or replace that money.

One avenue is to urge customers to give the required "opt-in" approval to keep charging overdraft fees and another is to push short-term products similar to "payday" loans.

In recent weeks, Chase bank, a part of JPMorgan Chase Co., has been sending letters to consumers with an offer that it urges them not to refuse.

"Your debit card may not work the same way anymore even if you just made a deposit. Unless we hear from you," the message, emblazoned in large red type, warns.

"If you don't contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 - even in an emergency," with "even an emergency" underlined for emphasis.

Chase and other banks are preparing a full-court marketing blitz, which is likely to include filling mailboxes with various aggressive and persuasive letters, calling account holders directly, and sending e-mail to urge consumers to keep their overdraft service turned on.

The reason is that the Federal Reserve's rules on overdrafts, effective July 1, will prohibit banks from charging fees at automated teller machines or on debit cards unless a customer has agreed to pay for being allowed to draw more than the account balance.

Many banks now automatically provide overdraft coverage, for which they charge fees of $35 or more.

So many people now dip their balances below zero that banks generated an estimated $20 billion from overdraft fees on debit purchases and ATM transactions in 2009, said Michael Moebs, an economist who advises banks and credit unions.

Given the billions at stake, consultants are urging banks and credit unions to hire them to help. Some are even lobbying banks to focus their pitches on the minority of customers who are responsible for the vast majority of overdraft fees. A 2008 Federal Deposit Insurance Corp. study found 93 percent of overdraft fees come from the 14 percent of people who exceed their balances five times or more in a year.

Pinnacle Financial Strategies, a consultant, advises an "Opt-in Total Solution" program for banks and credit unions trying to stem losses in overdraft fees. Its briefing paper urges an "account holder identification process" to zero in on consumers who pay such charges repeatedly and to persuade them to keep the status quo.

The banks' marketing campaigns range from subtle to alarming. In recent weeks, Chase has tested several direct-mail pitches to see whether an assertive or alluring tone will drive people into a branch to sign up for overdraft coverage.

"Watch your mailbox so you can say 'Yes' to continue Chase debit card overdraft coverage," read one note, a toned-down version of an alternate letter warning consumers that their debit cards might not cover emergencies, like a highway tow.

A spokesman for Chase said: "We have begun to reach out to customers and are encouraging them to sit down with a branch banker to make sure they understand overdraft services, which can be confusing. We want them to make an informed decision."

A Bank of America spokesman said that its efforts, including giving consumers a document called "Opting Out of Overdraft Coverage," are not meant to encourage customers to remain in overdraft services but to make sure they understand the complexity of the issue.

Rebecca Borne, policy counsel for the Center for Responsible Lending, said banks still had "tremendous incentive to get as many consumers to opt in as possible." That is because the new regulations still allow banks to charge high fees for overdrafts, with no limit on the number of times they impose the penalty.

Another way banks are trying to make up for lost overdraft-fee income is payday-type loans.

Banks including Fifth Third Bancorp, Wells Fargo & Co., and U.S. Bancorp are making such loans, charging $10 for every $100 borrowed for 30 days - the equivalent of an annual interest of 120 percent.

The loans, which they call "checking advance products," are comparable to those made by so-called payday loan stores, which target customers who generally don't have credit cards, offering to bridge the gap until their paychecks come.

Banks don't call the advances "payday" loans because it's a "very tarnished, negative brand," said Elizabeth Rowe, group director of banking advisory services at Mercator Advisory Group in Massachusetts.

Banks do caution customers that the loans are an expensive form of credit. Alternatives "may be more suitable to your long-term needs," says a statement on Fifth Third's Web site.

Still, Wells Fargo spokesman Richele Messick said the advance from the San Francisco-based bank is less expensive than a payday loan. The bank has been offering the loans since 1994.

"Wells Fargo encourages all our customers to properly manage their accounts," Ms. Messick said. "Emergencies do arise, and our Direct Deposit Advance Service can help customers when they're in a financial bind."

Cincinnati-based Fifth Third, Ohio's largest lender, began offering "Early Access" loans in September, 2008, before the current debate on overdraft fees and before the Fed announced its opt-in rules, bank spokesman Stephanie Honan said. The bank offers the advances only to existing customers with checking accounts in good standing.

At U.S. Bancorp, customers using "Checking Account Advance" may borrow anywhere from $20 to a preset limit, and loans are repaid from the account's next direct deposit. Wells Fargo's "Direct Deposit Advance Service" works the same way and allows a line of credit of as much as $500. Teri Charest, a spokesman for Minneapolis-based U.S. Bancorp, declined to comment.