For many households trying to improve their finances, tossing out pitches from the bank has become almost automatic. But in recent weeks, Chase has been fanning special letters out to consumers with an offer that it urges them not to refuse.
"Your debit card may not work the same way anymore, even if you just made a deposit. Unless we hear from you," the message, emblazoned in large red type, warns. "If you don't contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 -- even in an emergency," with "even in an emergency" underlined for emphasis.
As the government cracks down on the way banks charge fees for overspending on debit cards, the industry is mounting an aggressive campaign aimed at keeping billions of dollars in penalty income flowing into its coffers. Chase and other banks are preparing a full-court marketing blitz, which is likely to include filling mailboxes with various aggressive and persuasive letters, calling account holders directly, and sending a steady stream of e-mail to urge consumers to keep their overdraft service turned on.
Starting this summer, banks must get consumers to agree, or "opt in," to a service covering purchases on a debit card when there is not enough money in their account. The Federal Reserve has ordered the same restriction for banks that want to let people withdraw more than their balance at an automated teller machine. Many banks now automatically provide such coverage for fees of up to $35 or more.
So many people now dip their balance below zero that banks generated an estimated $20 billion from overdraft fees on debit purchases and A.T.M. transactions in 2009, according to Michael Moebs, an economist who advises banks and credit unions. All of this revenue is potentially at risk, since these are the two areas that the new Federal Reserve regulations cover. (Banks generate an extra $12 billion by covering checks and recurring bills; under the new rules, they can still cover those and charge fees without customers' consent.)
Over the last decade, these fees have become an increasingly important source of income for banks as consumers have turned to debit cards to pay for a wide variety of their purchases, whether monthly bills or a pack of gum. (Many banks also offer less controversial overdraft programs in which consumers sign up to cover shortfalls in their checking account by pulling money out of a savings account or a credit card.)
The persuasion campaigns, which are just getting under way, come at a precarious time for many banks and credit unions as they scramble to find new revenue streams amid an economic downturn and new laws and regulations that threaten profitability. For instance, new credit card laws that went into effect Monday limit banks' ability to raise interest rates on existing balances.
Given the billions at stake, consultants are urging banks and credit unions to hire them to help. "Your fee income will take a substantial 'hit' if you don't start getting consumers to 'opt-in' for POS/ATM overdrafts NOW!" Mike Sobba, president of Strunk & Associates, a financial institution advisory service, warned banks in a pitch on the company's Web site.
Some are even lobbying banks to focus their pitch on the minority of customers who are responsible for the vast majority of overdraft fees. According to a Federal Deposit Insurance Corporation study in 2008, 93 percent of overdraft fees come from the 14 percent of people who exceed their balances five times or more in a year.
"Doesn't it make sense to try and protect this revenue stream and encourage these customers to opt-in?" said Eric Wittekiend, strategic adviser at Raddon Financial Group, in a report aimed at banks and credit unions. "Right now I'm favoring an aggressive opt-in strategy to protect as much revenue as possible," he said.
Another consultancy, Pinnacle Financial Strategies, advises an "Opt-in Total Solution" program for banks and credit unions trying to stem losses in overdraft fees. Pinnacle's briefing paper urges an "account holder identification process" to zero in on consumers who pay such charges repeatedly and persuade them to keep the status quo.
The banks' marketing campaigns range from subtle to alarming. In recent weeks, Chase has tested several direct-mail pitches to see whether an assertive or alluring tone will drive people into a branch to sign up for overdraft coverage. "Watch your mailbox so you can say 'Yes' to continue Chase debit card overdraft coverage," read one note, a toned-down version of an alternate letter warning consumers that their debit card might not cover unexpected emergencies, like a highway tow.
A spokesman for Chase said: "We have begun to reach out to customers and are encouraging them to sit down with a branch banker to make sure they understand overdraft services, which can be confusing. We want them to make an informed decision."
When consumers get to the bank, another pitch awaits. Mark Sorenson went into a Dallas branch of Bank of America to turn off the overdraft function on his debit card recently and got a distressing response.
Beware, his banker cautioned. If Mr. Sorenson used the card to buy gas, the station might place a hold on his account and he might not be able to fill up at all, even if he had enough money in the bank to cover a full tank.
"My impression was that it was something he'd been briefed on," said Mr. Sorenson, an architect who said he had tired of paying multiple fees when the bank automatically covered shortfalls on his debit card. "He was trying it out on me."
A Bank of America spokeswoman said that its efforts, including giving consumers a document called "Opting Out of Overdraft Coverage," were not meant to encourage customers to remain in overdraft services but to make sure they understood the complexity of the issue.
Rebecca Borné, policy counsel for the Center for Responsible Lending, said banks still had "tremendous incentive to get as many consumers to opt in as possible." That is because new Federal Reserve regulations taking effect this summer would still allow banks to charge high fees for overdraft, with no limit on the number of times they impose the penalty.
Twinned with the blitz is a lobbying campaign in Washington by community banks and credit unions against several Congressional measures that would impose tough limits on overdrafts. They argue that their overdraft fees tend to be less than the large banks, and that overdraft provides a valuable service to customers, helping them overcome short-term money woes and saving them from the embarrassment of having a card rejected.
Several members of Congress have proposed legislation that would allow banks to charge just one overdraft fee a month, and six a year, and prohibit the reordering of transactions from largest to smallest to maximize fees. But while Democratic leaders insist overdraft legislation remains a priority, the bills have languished as lobbyists have pushed for delay and Congress focused on other financial issues.
"The ultimate strategy was not delay for delay's sake," said Steve Verdier, director of congressional affairs at the Independent Community Bankers Association. "The strategy was to ask Congress for enough time to explain the complexity."
Amid a growing public outcry over these fees, several large banks announced changes to their overdraft policies last year. Bank of America said it would not charge a fee when customers exceeded their balance by $10 or less per day and would limit overdraft fees to four per day. At the end of March, Chase is eliminating overdrafts for customers whose accounts are overdrawn by $5 or less and has already limited overdrafts to three per day.
But even with those changes, customers could still incur more than $100 in fees a day if they opt to take overdraft coverage.
At least one credit union is using the new Fed rules to try to differentiate itself from its competitors. On its Web site, the UW Credit Union in Madison, Wis., says, "While we expect some financial institutions may aggressively market the idea of a consumer 'opt in' within the boundaries of this regulation, we have no such plans."
More than 1800 banks and credit unions made changes in how they handle overdrafts since Regulation E, mandatory opt-in for debit card and ATM overdrafts, was made a requirement by the Federal Reserve on November 11, 2009. Of all the financial institutions surveyed, 11.4 percent either increased price, decreased price, began offering or stopped offering overdraft service. These results come from a nationwide statistical survey of more than 2,000 banks and credit unions conducted in early March 2010 by Moebs $ervices, Inc. a Lake Bluff, IL- based economic research firm.
