Why your bank wants you to sign up for overdraft protection

If you feel like your bank really, really wants you to opt-in for overdraft protection, it isn't your imagination.

The official date -- August 15 -- for opting in or out of overdraft fees has passed. Meaning, thanks to new regulations passed by the Federal Reserve, if you haven't agreed to allow your bank to give you overdraft protection, as of August 15, you no longer have it.
That means if you're down to your last few cents and need to fill up your car with your debit card, your bank won't let the purchase go through. Of course, the good news there is that you won't be slapped with an overdraft charge, either.

But just because the August 15 date has passed, doesn't mean your bank won't try to make you see their reasoning behind opting in for an overdraft protection plan, which would automatically transfer funds from another account to cover the shortfall in the depleted one. According to an online poll that the National Federation for Credit Counseling took last month, approximately 25% of Americans planned on opting in for overdraft coverage, which means that banks will likely continue to try and persuade the remaining 75% Americans that it's in their best interest to "opt-in" for overdraft protection.

We've covered pretty thoroughly at WalletPop why you're probably much better off resisting the banks' pleas and opting out, but if you're still not convinced, or if you've opted out but want validation, it might help to see exactly how banks are trying to convince you to sign up.

Some banks have lowered their overdraft fees, including U.S. Bank, which used to charge $37.50. Now, if you make a transaction that puts you less than ten dollars in the negative, there will be no fee. If your erred transaction is under $20, you'll find your account charged ten bucks. If your purchase cost over $20, your fee will be $33. So the punishment is more in line with the "crime."

Huntington, PNC, Chase and Fifth Third are waiving fees for transactions that are $5 or less, that wind up taking you into overdraft territory.

The cynical analysis for why banks are lowering the fees: They want you to feel safe again, so that you'll drop your guard and spend freely -- then make a series of big miscalculations. Then the banks can collect lots of smaller fees.

They're replacing overdraft fees with maintenance fees. Look for banks to do more of this: Key Bank has a new checking account that, for $10 a month, allows you to have two free overdrafts a month and reduced overdraft charges -- just $18 if you go into the negative of $100 or less, and no fee if you're ten dollars or less in the hole.

Banks are using psychology in their marketing. Jason Biro, founder of the nonprofit Saving Your American Dream,and who I interviewed recently for another WalletPop post on overdrafts, recently alerted me to Acton Marketing, a direct marketing company that provides complete direct mail marketing programs for financial services clients.

Action Marketing's web page, aimed at prospective banking clients, is pretty chilling to read, from a consumer's point of view. Of course, if I were a banker, I'm sure I'd hire this outfit. "Millions of dollars are at stake," the page declares. "What will it take to get your customers to opt-in? The clock is ticking... you know that... so how will you get stubborn overdraft users to opt-in? Have you even started?"

It goes onto say that Action Marketing will offer solutions "spread across various methods and media," and will show clients "what you need to do to acquire the highest number of opt-ins, especially from the most important group -- the regular NSF users. We can spread the message over various media so you have the best opportunity to get the attention of each individual and -- most importantly -- get them to respond."

The NSF users refers, as you probably know, to non-sufficient fund users. There's a core group of them that banks are after: 14% of checking account customers generate 93% of overdrafts, according to a recent Federal Deposit Insurance Corp. survey.

And as Action Marketing's director of modeling and statistical analysis Zach Gabelhouse said in a news release earlier this year, "we'll find the sweet spot for [insufficient funds] fees and determine what the consumer will accept."

For just $795, banks can buy Acton's study, which offers answers to such questions as:
  • Which alternative NSF fees and program strategies will increase your customers' opt-in?
  • How should your customers' psychology affect the type of NSF overdraft protection offered by your bank?
Of course, it's pretty understandable why banks want you to opt-in for overdraft protection. After all, last year, out of the estimated $37 billion banks collected in overdraft fees, $18 billion came from people misusing their debit cards and taking out money they didn't have from their ATMs. (The rest of the money came from automatic withdrawals and checks going through when there weren't enough funds in the account, and overdraft fees can still occur in those situations.)

When it comes to overdraft protection, the banks know that there is a lot of money at stake -- yours.

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.


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