Fed Moves To Block Some Overdraft Fees

The Federal Reserve announced new rules Thursday on when banks can charge overdraft fees on ATM and debit card transactions. Fed Chairman Ben Bernanke called the new rules an important step forward in consumer protection. Starting July 1 of next year, banks will not be allowed to charge an overdraft fee unless the account holder has asked to be covered by an overdraft plan. Melissa Block talks to NPR's Tamara Keith about the new rules.

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MELISSA BLOCK, host:

There are big changes afoot for anyone who has a debit or ATM card. The Federal Reserve has announced new rules to protect consumers from overdraft fees. Banks will be banned from charging the fees unless consumers opt in. NPR's Tamara Keith joins us now to explain the details. And, Tamara, how will this work?

TAMARA KEITH: Well, many banks have been automatically enrolling their customers in overdraft services and that automatic enrollment is what will change. A lot of us operate on the assumption that if you take your debit card to the coffee shop and you swipe the card and you don't have enough money, it will be denied.

But with these overdraft services, that isn't the case. Instead, the bank fronts you the money and now you have a fee and a $35 cup of coffee, which no one actually wants. And often the debit is less money than the fee. So, now banks will have to ask their customers - both new and existing customers - do you want this? Customers will have to opt in.

BLOCK: And what does that mean for the banks?

KEITH: Well, overdraft fees have been a huge profit center for banks, in part because we're all using our debit cards so much more, especially for these small purchases like coffee or lunch. And one report I saw said that banks make about $18 billion a year on these overdraft charges on ATM and debit cards. So, how this rule change affects them will really depend on how many people opt in.

BLOCK: And if you don't opt in, you cannot overdraw your account?

KEITH: Right, you will just be denied.

BLOCK: Be denied. What about fees on overdrawn checks, say, or maybe automatic payments, like auto-paying for a bill? Does it work the same way?

KEITH: No. Those are not covered by this rule. The Federal Reserve talked to consumers in focus groups and people are more willing to pay an overdraft charge on one of these types of payment because it might be your mortgage or your power bill. And so a $30 overdraft charge on that seems palatable.

BLOCK: What about if you already have overdraft protection on your account, Tamara? What happens then?

KEITH: Well, banks will be getting in touch with all of us and asking us if we want to opt in. And the Fed has come up with some very clear language that will be sent to all customers to describe the options. And one thing that's worth noting here is that we're talking about overdraft services where the bank advances the customer money for the transaction to go through. But there are other types of overdraft protections out there, like linking to a savings account or a credit card, and those actually tend to be cheaper.

BLOCK: Tamara, when does this new rule take effect?

KEITH: The rules take effect on July 1st for new accounts, new cards. For existing accounts, it's August 15. And this comes as Congress has been considering even stricter overdraft rules and also creating a new consumer protection agency.

BLOCK: Okay. NPR's Tamara Keith, thanks very much.

KEITH: Thank you.

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