Relief from Excessive Bank Overdraft Fees Could Be Short-Lived

July 10, 2010, 3:30PM. By Gordon Gibb

Charlotte, NCAs new federal laws governing excessive bank overdraft fees come into effect, banks will attempt to replace lost revenue by charging a variety of other fees, according to the 7/3/10 issue of the San Jose Mercury News.

The updated guidelines basically take the surprise out of the equation for the bank customer, although the steep cost isn't going away. The Mercury News, in a story that originated in the Charlotte Observer, states that banks can charge as much as $35 per transaction.

Now customers have to give banks permission to cover overdraft charges. If the consumer wants the bank to cover everyday debit card purchases and ATM withdrawals when they have insufficient funds in their accounts, then they have to give the bank permission to do so. It will no longer be done automatically without the consumer's prior consent.

If the consumer does nothing, it is possible that a transaction will be denied in the event of insufficient funds.

Overdraft protection (OP) in the nontraditional sense is another way of handling potential overdrafts. The opt-in service may draw funds from a savings account or a credit card when a primary account appears bereft of a sufficient balance. While there is a cost for such a service, it is usually not as expensive as traditional overdraft protection, where the bank is using its own money to make good on the overdraft.

There could be more good news for the consumer up to now inundated with excessive bank fees, as Congress weighs financial reforms that could further curb revenues for banks. What's more, a recent report by Sandler O'Neill + Partners (SO+P) noted that the lost revenue from charging for overdraft protection is "fairly manageable" for banks.

Still, it's not an insignificant loss. For Bank of America and Wells Fargo, the negative revenue hit from lost fees could be $2.2 billion for the former and $1.1 billion for the latter, according to SO+P.

Critics say that kind of revenue loss could have banks considering the implementation of new fees to make up for the shortfall—although a senior financial analyst with Bankrate.com suggested that banks would take a wait-and-see approach before attempting any changes or adopting new fees.

That said, the Charlotte Observer noted that some banks are already starting to design new fees to counter the loss in revenue from excessive bank overdraft fees, although they have yet to be rolled out. Smaller banks, which may depend more on fees and service charges than larger banks to stay afloat, may be more inclined to raise fees in other areas.