Smithee, a staff writer over at Consumerism Commentary, gave his opinions on the positive opt-in that's now necessary for banks and credit unions to enroll customers in overdraft privilege services. In a previous life as a Bank of America customer service representative, he had to tell customers that they couldn't opt out of the overdraft service privilege — a fee-based service that amounts to providing a short-term loan to cover an overdrawn account.
Smithee was celebrating this law. Part of his celebration revolves around perceived greater consumer choice:
From what I could tell, there should’ve been a third option between paying overdraft fees several times a year and carrying some kind of man-purse [to carry around a check register and receipts]. That third option is now here: you can turn off overdraft protection. Even better, it’s being turned off for everybody unless they turn it back on. All the law does is give consumers more options.
Our credit union has had a similar overdraft privilege for a while. I was opted in automatically, but I had the ability to opt out at any time should I not want it. It wasn't mandatory like Bank of America's.
So, in a way, Smithee's cause for celebration is a bit off. The consumer choice was always there — just not necessarily at every financial institution. If my credit union allowed customers to opt out, then I'm sure others did as well. If a customer really had no use for overdraft privilege, then they could simply part ways with Bank of America to choicier pastures. Banks can't be all things to all customers. So what?
Now, though, banks and credit unions aren't free to enroll their customers automatically into overdraft privilege. They must get positive opt-in. It's a business restriction. It gives banks and credit unions fewer options for offering service to their customers. Because banks and credit unions must get permission from each and every customer — even current ones — it will affect banks' bottom lines negatively. It has to. Having overdraft privilege service arrangements with only a quarter of your customers can't be as profitable as having that arrangement with all of your customers (or most of them, if they were allowed to opt out). (Hat tip to Sun's Financial Diary for the Huffington Post link.)
Every bank and credit union is taking it on the chin, and that means that it will be bad news for all banking customers. The frequent fliers — the users of overdraft privilege services who are most profitable to the bank — may or may not opt in, and that revenue will be gone, which in turn will affect the level of service that it gives to all of its customers. Fees go up, customer service wait times go up, ATM fees go up, credit card rewards go down, minimum balances for interest-bearing checking go up, etc., etc. Everyone loses, because every financial institution is less able to treat its customers like the adults that they are: free to choose how they manage their money, and responsible for the consequences of how they manage their money.
Mandatory overdraft privilege, may you rest in peace. You weren't for everyone, but people didn't have to run too far to get away from you. You were a fixture of a freer, less regulated time. What you stood for will be missed.
With your passing, a little bit of the free market died.
Oh, please.
It’s lovely that you could opt out at your institution. At my local credit union, I was never informed that my second checking account would be charged a “courtesy fee” of $25 for every overdraft I had even though I had a line of credit linked for overdraft protection on my primary checking account. 8 tiny purchases later, I managed to argue them down from $200 in overdraft fees to a mere $50.
The Free Market is great and all, when there is sufficient transparancy that homo economicus can make an educated decision. With the limited transparency before this law went into effect, it cost me $50 to learn that my local credit union has nothing close to the customer service I received from the big bank. I’m switching back today, and I rejoice that others won’t be swindled out of their money for a latte just because the credit unions could get away with it.
Maria, are you sure? I get a fee disclosure at least once a year from my credit union. I think they have to disclose their fees at least that often, or when they change.
You have got to be kidding me.
The free market is a myth (in capitals, no less) it’s the lullaby mothers hum to their children while raving packs of wolves massacre the livestock. It’s a paean for those who need assurance all is right with the world while predators empty their savings and laugh all the way to the Maldives.
Having a freer market is fine to a point but the profane idea of the “Free Market” needs to die.
I paid 35$ overdraft fee to Chase for 10$ grocery store purchase. I closed my account the next day. RIP.
@Roy: Maybe I should have said “what’s left of the free market.”
Bankers earn billions of dollars each year on overdraft protection, they want people to be irresponsible because it “stuffs” their bank accounts with your hard earned cash!
I agree wholeheartedly that adults should be treated as responsible, thinking beings. However, there are some circumstances where the mandatory opt-in to overdraft privilege services can be very detrimental. Think about a small business that opens banking accounts with Bank of America and has more than one partner/ owner. The bank did not make it clear at the opening of the account that they would charge $35.00 for every overdraft instead of just denying the check card. Both partners must carry a card (taking the card away from one is not an option). One partner repeatedly overdraws and most of the time when it occurs, there are more than 5 charges in the same day. If this happens once a week, that would be $700/ month. The business is just a start up and cannot afford to change banks by the time they learn the effect.
I’m not a fan of the government creating laws to protect us from ourselves. Perhaps for business accounts that affect more than just one person, it would have been good practice to alert the partners before they could not turn back and make a different decision.
Thanks everyone for your comments! This is a good discussion.
@Jack: Also bear in mind that if you are one of the responsible ones, the irresponsible ones are subsidizing all of the perks you get.
@Roxanne: Interesting, but I think this lies mostly on the people getting involved in the business relationship, and very little on the bank.
There are a lot of details in running a business (I’ve been in a business relationship with someone, and it wasn’t always smooth sailing!) and things really have to be super-clear between the partners, especially with handling the money. It’s a lot like a marriage in that respect.
Consider this thought, the free “perks” banks offer such as “free checking accounts” are simply vehicles the banks use to fund additional lending activities where the bank makes money.
Excess funds in the checking account that are not used by the account holder are then made available to the banks so that lending activities can be engaged at significantly higher interest rates. There are certain reserving requirements that the bank must follow, but they are allowed to use “other People’s Money” in other words the depositors, those who open up savings/checking accounts and certificates of deposit. No business offers anything “free” without getting something in return!!