How the death of B of A's overdraft fee hurts you
Bank of America's $35 charge didn't target its best customers. But they might have to chip in to make up for the lost revenue.
Bank of America (BAC) just announced it will stop charging overdraft fees of $35 for most of its debit card customers. You may think that if you pay your bills on time and don't suffer overdraft fees that the changes don’t apply to you. Well, think again.
"Serial overdrafters" who constantly spend more than they have are big business for banks -- overdraft charges and related fees generate $1.77 billion a year. Without that revenue stream, these financial companies are going to have to find another way to make their cash. That could mean higher expenses for even responsible customers.
Let’s look at Bank of America. The Wall Street Journal reports that Bank of America now has 37 million debit-card customers who generate 60% of all overdrafts for the bank. Without those folks running up huge fees, BAC is going to take a significant hit in its bottom line. That likely means the good customers are going to have to chip in.
Anyone with common sense knows B of A wasn’t limiting overdraft charges out of the kindness of its heart. A Federal Reserve decision that bans the fees would have the same effect when it begins on July 1, so B of A is just getting out ahead of things. All other banks will soon follow. But a bigger question is whether the Fed’s good intentions will cause more headaches than help across the entire banking industry. Large banks already struggling with still-weak balance sheets and spotty earnings caused by the credit crisis will face another hurdle in their recoveries as they lose the overdraft fee.
Still, the move is not without its proponents. It is questionable that many consumers even wanted overdraft “protection” in the first place. Banks can charge customers the overdraft fees if the customers consent to it, but soliciting permission from tens of millions of customers is different than enrolling them automatically.
New bank regulations are often double-edged swords. Consumers do not want banks to take advantage of them, but they want all the benefits of doing business with large financial companies that can extend them credit so that they can buy goods and services when they need to. They don’t want hidden charges, but they also don’t want to be embarrassed at the cash register when their card is declined due to insufficient funds in their checking account.
The bottom line is that this move to eliminate $35 charges at Bank of America is simple on the surface but will cause a heck of a lot of changes across the industry. Consumer banking just got more complex, and that may not benefit anyone.
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