Overdrafts' Demise Could Be Overblown in Flux: Card Businesses

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Byline: Sara Lepro

Don't underestimate the staying power of overdraft protection.

Less than two months before new rules on the coverage take effect, early indications suggest banks won't suffer as big a blow to fee revenue as feared.

Ever since the Federal Reserve announced last year that it would require financial institutions to get consumers' consent before enrolling them for overdraft protection on debit card purchases and automated teller machine withdrawals, it was widely assumed that customers would opt out in droves.

New research, as well as anecdotal evidence, indicates otherwise. That means features like free checking - which some have put on the endangered species list - might not be headed for extinction after all, at least not just yet.

A recent study from ACTON Market Intelligence shows that consumers who use overdraft protection on a regular basis are likely to opt in and are willing to pay for the coverage - in some cases, even more than they pay now.

"Losing overdraft fees is not a foregone conclusion," said Gary Gabelhouse, an analyst at the unit of ACTON Marketing LLC. "The bank doesn't have to lose. An enlightened bank can make this work."

After surveying nearly 1,300 consumers around the country in February and March, ACTON determined that 58% of all customers would opt out. However, the vast majority of those who use overdraft protection regularly will choose to keep the service. As a result, the study, which ACTON distributed to its clients last month, concluded that about 73% of the nation's overdraft business is secure, leaving only 27% of the business at risk.

Under the Fed's Regulation E, banks and credit unions have until July 1 to obtain permission from new customers and members, and until Aug. 15 to get permission from existing customers.

Of the 100.1 million debit card accounts in the country, 37% had been overdrawn and used their respective bank's overdraft protection at least once in the past year, according to the ACTON study.

Thirty-five percent of overdraft users are considered "heavy" users, meaning they use overdraft protection more than 10 times in a year. That slice of the market accounts for 81% of all overdrafts every year, ACTON said.

The study found that heavy users "would likely pay even increased fees - even $45 per covered transaction."

Still, several banks have recently moved to reduce some of their fees and cap the number of times a person can be charged in a single day for overdrawing his or her account. Analysts called such moves a way to boost banks' overall image, which can be more valuable than the fees themselves.

"When you get into overdraft, you also have the moral high ground that some banks are trying to play," said Hank Israel, director of checking and payments for Novantas LLC, a New York consulting firm. …