Here Come The New Overdraft Rules

photo: Joshua Davis

YOUR DEBIT CARD MAY NOT WORK THE SAME WAY ANYMORE.

The message has been everywhere: on the ATM screen, in the mail, on big signs at my local branch, possibly in my dreams. It’s warning me that unless I opt in for overdraft coverage, as of August 15 my debit card will no longer carry that feature. Neither will yours.

Overdraft coverage is a feature that allows a bank to approve a debit card transaction even when there isn’t enough money in the checking account to pay for it. For the privilege, the bank then charges the customer a fee (typically about $35).

Here’s how I’d try to sell it if I were a bank:

It’s a dark and stormy night. Your car breaks down on a lonely road outside the state prison. With one bar on your phone and the battery fading fast, you call for a tow. The tow truck driver swipes your debit card. Declined. “Sorry, pal,” he says before driving off, “not enough cash. You should have gotten overdraft protection.” Your spouse is in the car and leaves you for being such a cheapskate. And did I mention the prison?

If you’ve incurred overdraft fees in the past, your bank is likely to lean on you hard to continue the coverage, because in their eyes, you’re like a big tipper.

For anyone fed up with overdraft fees, next week brings good news:

1. As of August 15, customers will be required to opt in if they want to continue paying those $35 fees for their dark-and-stormy-night (or latte and bagel) needs. In other words, if you don’t do anything, you’ll lose the ability to overdraw your account with everyday debit transactions next week.

This doesn’t affect checks or recurring transactions, only ordinary debit card point of sale (i.e., cash register) and ATM usage. Without overdraft coverage, those transactions will simply be declined; bounced checks will still incur a fee.

Even if you think you’ve opted out or never opted in, double-check: some banks have been accused of deceptive practices by Consumers Union and other consumer groups.

2. Some banks, such as Bank of America (BAC), have taken the high road and have simply gotten rid of overdraft coverage for everybody. (BofA still offers overdraft protection, which I’ll explain in a minute.)

Of course, there’s also bad news:

1. The new rules don’t apply to business accounts. I presented my small business debit card to my banker; she told me I couldn’t opt out on that card.

2. The new rules do nothing to rein in tricks like the bank clearing your transactions from largest to smallest and thereby hitting you with multiple overdraft fees in one day. Some banks, such as JP Morgan Chase (JPM), have voluntarily changed this policy, but others have not.

3. Banks are getting their message across, according to a May survey by Credit.com, in which 48% of respondents said they would opt in. Customers are responding to efforts like this one from Acton Financial Services Marketing, which helps banks convince customers to opt in.

4. Overdraft is big business. Banks aren’t going to shrug off lost income. Many sources, including the New York Times, have speculated that we’ll see the end of free checking, since overdraft-happy customers have been subsidizing free checking for everyone else.

Dan Mahoney thinks this last objection is a crock. He’s a spokesperson for an BancVue, a marketing firm serving community banks and credit unions. “Accounts have built-in switches and levers that can be adjusted to counteract reductions in fee income,” says Mahoney. This is banker-speak for “the bank can just raise loan rates or lower deposit interest rates rather than charge fees on your checking account.”

Full disclosure: Mahoney does have a dog in the free-checking game: his company helps community banks and credit unions offer so-called “rewards checking” accounts, which offer very high yields (often north of 4%) to customers who use their debit cards a certain minimum amount of times a month (typically 10 or 12).

Now, back to that dark and stormy night.

If your debit transaction is declined, you don’t have to bum a ride from an escaping convict. Do you carry a credit card? Great. Credit card debt isn’t cheap, but it’s often a lot cheaper than overdraft fees.

Second, there’s a difference (work with me here) between “overdraft coverage” and “overdraft protection.”

* Overdraft coverage is what we’ve been talking about so far and what the new rules affect: the bank agrees to cover your payment in exchange for a fee. It’s opaque and expensive: the bank reserves the right not to cover you; they charge a large fee; and if you don’t put your account back into the black within a few days, they charge you again. It’s similar to a payday loan.

* Overdraft protection is when you link your checking account to a savings account or preapproved line of credit. If you link your checking to savings and then overdraw your checking, the bank will charge you a small fee ($5 or $10) and transfer money from your savings to cover the payment. Better yet, you can only be charged the fee once per day. If you qualify, linking your checking account to a line of credit is even better: this product, popular at community banks and credit unions, generally doesn’t carry a fee at all, just the interest on the credit line.

Do you have a balance in your PayPal account? If you’ve got enough signal to call the tow truck, you can probably also use PayPal from your phone.

Or just call Mom.