Banks Take Big Hit on Overdraft Fees

Banks Take Big Hit on Overdraft Fees

The largest debit card issues in the US, Bank of America and JPMorgan Chase announced major changes to their overdraft-fee policies. The changes came in response the government pressure due to the rising number of consumer complaints about excessive fees.

Senator Christopher J. Dodd, who is chairman of the Senate Banking Committee, promised to introduce legislation that would require banks to get customers’ permission for overdraft programs. Two overdraft regulation bills already have been introduced in the House of Representatives. And the Federal Reserve in January mandated better overdraft disclosures starting Jan. 1, 2010, and is considering further regulations.

According to Federal Deposit Insurance data, banks’ service charges on deposit accounts had risen from $16 billion in 1994 to $39 billion in 2007, most of that driven by NSF-fees. Overdraft fees have been pure gravy for debit card issuers with NSF fees on signature debit cards accounting from 30% to 50% of total the revenue issuers earn on these cards. A $5 debit card purchase on an overdrawn account can easily the cardholder $35 to $40 because of the NSF fees.

According to a 2008 FDIC study of bank overdraft programs 74% of DDA accounts an incur no NSF/overdraft fees, but 5% of accounts incurred 20 or more NSF transactions annually and accounted for 68% of fee revenue.

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