New rule on overdraft fees is good move

One of the better things the Federal Reserve Bank has done recently is establish a new rule regarding overdraft fees on ATM and debit card purchases.

Many banks have been routinely providing overdraft protection to their customers, meaning they would cover purchases even if there was not sufficient money in the accounts to cover the withdrawal. In return for this favor, the banks collected hefty fees of $25 to $35 every time they did it, even for very small overages.

Clearly, those fees can add up quickly if the account holder doesn't realize they are overdrawing their account and continues to make withdrawals or debit card withdrawals. And even if there is only one overdraft "loan," the fee often leaves account holders gasping.

It is understandable that banks want to be reimbursed for this overdraft protection. After all, the bank is providing its money to back the account holders, who should be responsible enough to manage their own finances and be aware of how much money they have in their accounts.

So it is hard to fault banks for charging overdraft fees - although many would question the amount.

What they can be faulted on - and many consumer groups and regulators have done so - is providing this service without permission of the account holder. Instead the overdraft protection is automatically applied, even though the account holder might prefer to simply have the funds request rejected rather than pay a fee.

The funds rejection is potentially embarrassing or inconvenient for the bank's customer, but that's on their shoulders and perhaps they would then manage their funds better.

What the Federal Reserve did was remove the involuntary part of overdraft protection with its new rule. Beginning July 1, bank customers will have to agree to the overdraft protection or they will not receive it.

That's the way it ought to be.

Perhaps the banks saw automatic overdraft protection as good customer service - or perhaps as a fee generator, as some critics claim - but either way the new rule is one that is needed.