Relief from overdraft fees may be short-lived

McALLEN — Pedro Garcia may never pay $40 for a sandwich again.

A new federal rule requires banks to get permission from account holders before providing them with overdraft protection services. For Garcia, a 21-year-old student at the University of Texas-Pan American, that means he won’t have to worry about owing his bank hundreds of dollars in overdraft fees each time he accidentally busts through his balance.
“I got in trouble when I was 19,” Garcia said. “I almost owed $1,000 (in overdraft fees). I wish the banks would do something to remind me.”

Garcia said he had been using his check card that week to make small purchases for food, gas and “everything a student needs to get to class.” His first overdraft purchase happened when he bought a sandwich for lunch at UTPA’s student union. Several days later, he realized his bank had been charging him dozens of overdraft fees.

“I had to call my parents,” Garcia said. “I’ve been pretty good about it since.”

WHAT THE RULE MEANS

Under the new guideline, banks must give customers the option to choose how the financial institution will deal with debit and ATM card overdrafts. In the past, some banks
automatically enrolled clients in a standard overdraft program when they opened an account.
Now, banks must ask for permission, and customers have to opt in by Aug. 15.

If a customer doesn’t opt in, the transaction will typically be declined instead of triggering an overdraft. Customers won’t be charged an overdraft fee, but they won’t be able to complete the purchase or withdrawal, either.

‘A HEAVY PRICE TAG’

Not everyone will find the new option so useful. Vidal Balli, a counselor with the Corpus Christi-based Consumer Credit Counseling Service said some of his clients use overdraft protection to pay for bills and make everyday purchases — even when they know they shouldn’t.

“They have problems paying bills, making car payments,” said Balli, who works in Consumer Credit’s McAllen office. “So they rob Peter to pay Paul and they get deeper and deeper into debt.”

Balli said opting out of overdraft protection would ultimately benefit people who have trouble managing their money. But some consumers with negative balances depend on their active check cards to pay for basic necessities.

“For the most part, (opting out of overdraft protection) is going to help them not get further
into debt,” Balli said. “But on the other side, it’s not going to allow them to use money they don’t have to pay for the stuff they need.”

Melissa Goonan, a spokeswoman for Consumer Credit, said overdraft protection gives consumers a false sense of security about their spending. Before overdraft protection became standard for checking accounts, bouncing a check or having a credit card declined was “a huge, embarrassing deal,” she said, recalling the days when restaurant owners would line their cash registers with bounced checks “as a way of shaming people and giving them an incentive not to do that.”

“It’s a heavy price tag to settle those fees,” Goonan said. “Maybe the solution means educating the younger segment of our population on financial management … because over the years, things have really changed a lot.”

Obviously, there is a simple way to avoid owing banks overdraft fees.

“You don’t have to worry about it if you’re responsible with your money,” said Andrea Loya, a counselor at Raymondville High School who sells Avon beauty products on the side. Loya said she kept her overdraft protection service for emergencies. “I would rather save myself the embarrassment of having my card declined at dinner.”

END OF FREE CHECKING?

Banks say the new rule will reduce expected revenue from interchange fees and some financial institutions may start charging customers for checking accounts — which have typically been free for more than a decade — to offset those costs.

“There have been massive regulatory changes — approximately 5,000 pages of new regulations that banks now have to comply with — which presents a huge challenge,” said Carol Kaplan, a spokeswoman with the American Bankers Association. “Like any business, a bank must bring in revenue that exceeds its expenses.”

According to an ABA study, the cost of opening a checking account runs between $150 and $200. The yearly cost of maintaining an account runs between $250 and $300. The costs of providing transaction account services include expenses for fraud losses that consumers are not liable for and the price of ATM deployment and maintenance.

“One thing to understand about checking accounts is, by and large, most checking accounts are not profitable for banks,” Kaplan said. “The reason banks (offer free checking) is because they want to develop a relationship with the consumer.”

Banks use checking accounts to entice customers into purchasing products from them, Kaplan said.

David Guerra, head of International Bank of Commerce in the Rio Grande Valley, said the bank is bracing for the sweeping overhaul of finance rules that President Barack Obama signed into law last weekCQ.

“Every bank is trying to do it differently, I imagine,” Guerra said, on how financial institutions are dealing with the changes. “Our desire is to continue to offer free products — free checking being one of them. We want to continue to offer those free products as long as the new federal regulations permit us.”

Kaplan said some banks may avoid charging for checking accounts by raising fees for other products and services.

“They could start raising the fees for money orders or cashier’s checks,” she said. “They could charge for things they might have done on a complementary basis.”