Much of the clatter in recent press and on the blogosphere (MYC included) has been over the recent spate of overdraft fees and other charges that banks are levying, ostensibly in order to makeup for lost profits due to the all-shook-up credit card industry. Much of the big change has been due to the Credit CARD Act, which, for better or for worse, has vastly changed the rules by which banks and lenders must play. Now, as ire rises over debit card fees and perceived injustices, several voices are crying out for debit card reform. Here are a few proposals as food for thought:

The Maloney Bill: Consumer Overdraft Protection Fair Practices Act” (H.R. 1456)

This bill was introduced in March 2009 and since then has only been heard on a subcommittee level. Spearheaded by Representative Carolyn Dalony (D-NY), senior member of the House Financial Services Committee, this bill would:

• Force credit card companies to notify users of overdrafts before transactions go through and give them the chance to cancel the transaction on the spot
• Require customers to opt-in for overdraft protection, rather than being enrolled automatically when they open their account
• Bar banks from manipulating the order in which transactions are processed in order to maximize the amount of penalties

While these stipulations seem very beneficial, there are some considerations. First of all, as Scott Talbott, chief lobbyist at the Financial Services Roundtable argues in the New York Times, the cost and logistics of outfitting every point-of-sale register with the equipment and software necessary to provide an interface for notifying customers of overdrafts are prohibitively expensive and complicated. Card readers at the register are very different from ATMs and other banking machines, in that they are only designed to authorize or decline a card, not read the balance or provide interfacing with the bank. Plus, part of the entire point of overdraft protection is to save customers from the embarrassment of having their card denied in front of a long line at the grocery store – a measure that is essentially mooted with such an interface.

Talbott argues against the accusations of manipulating transactions – i .e. processing larger transactions first so that all subsequent smaller purchases incur overdraft penalties – by citing a customer survey that stated that consumers would rather have it be done this way so that big bills, like rent and utilities, would go through while smaller expenses, like a cup of coffee, would be denied. It’s better to be in hot water with Starbuck’s than your landlord, the argument goes.

The Salmon Plan

However, it is important to remember that Talbott is very much on the side of the credit card comapnies. The Financial Services Roundtable is, after all, an advocacy group for big banks and lenders. This same group states that up to 1,000 banks and 2,000 credit unions could go out of business if limitations on overdraft fees were enacted due to the fact that 45 percent of them make more money on such fees than other profits. But of course, as Felix Salmon, a blogger at Reuters points out, that figure may be a bit overblown – after all, as we discussed earlier here at MYC in our post about credit union credit cards – credit unions don’t exist to make profits. Salmon, meanwhile, has his own ideas about what debit card reform should look like:

• Let banks have automatic overdraft protection, but only if you are charged interest on the overage, rather than a flat fee. (Kind of like an overdraft line of credit.)
• Customers have to opt-in for any protection that does come with a flat fee in addition to or instead of interest.
• Said fees would then be capped at $20 per day.

These does sound like more of a compromise than Maloney’s bill. Still, there may be some opposition. Automatically signing up all customers for an overdraft line of credit means basically opening a revolving credit account for every person with a checking account. That can mean that you might be able to be denied for a checking account if your credit isn’t up to snuff (though I suppose you could just opt-in for the fee-based model instead – but then it’s goodbye to “free checking accounts”). The capping the fees at $20 is the best point. The fact that banks charge you upwards of $34 for each individual overdraft is absolutely preposterous – especially since most of us are unaware that we are overdrawing until we see our statement. One can argue that overdrawing your account is somewhat negligent, but the punishment shouldn’t compound throughout the day – it’s not as if those overdrawing are doing purposefully (really, who would want to pay hundreds of dollars in fees just so they could get a snack at the drive-thru?).

More Arguments

Over at AmericanBankingNews, blogger Gary is somewhat unsympathetic to the plight of gouged debit cardholders. He points to a figure from recent FDIC data: 93 percent of overdraft fees come from 14 percent of cardholders. Not only that, this 14 percent overdrew an average of 5 times a year. Whether this is indicative of the need for greater financial literacy or debit card reform is a point of contention. The post does concede that banks should be more forthcoming about automatic enrollment in overdraft protection. But it is a good point – if the majority of cardholders don’t overdraw, why is there so much outrage?

What do you think? Are we overdue for sweeping debit card reform on par with the recent credit card legislation? If so, what would you change? If no, what should we as individuals change about our spending habits?

Photo by orphanjones

Related posts:

1. Defeat Overdraft Fees and Debit Card Trickery Using Credit Card Smarts
2. Debit Card Purchases Triggering Overdraft Fees
3. Understanding Debit vs. Credit With Your Debit Card
4. Debit Cards Causing Overdraft Fees
5. The ‘12 Days of Christmas’