Banks back off overdraft fees, will make up profit elsewhere

NEW YORK (AP) -- Banks are backing off harsh overdraft fees and policies. That's the good news. The bad news is they'll probably look to make up that lost profit elsewhere.

It's a worrisome prospect for the vast majority of customers who never overdraw their funds and have grown accustomed to perks like free checking accounts.

"Banks are going to have to get creative. Rather than generic free checking accounts, you're going to see lots of different flavors of products," said Bob Meara, a senior analyst with Celent, a Boston-based consulting firm for the banking industry.

That might mean the return of monthly fees or minimum balances for checking accounts, or the bundling of accounts with other services for a fee.

Customers could also be steered toward lower-cost services like online banking, Meara said. Use of debit cards, which bring banks revenue from store interchange fees, may be encouraged. And networks of bank branches across the country could shrink too.

Such changes could help offset the steep losses banks face as they overhaul their overdraft programs, which have come under intensifying scrutiny in the past year. Critics say automatic enrollment in overdraft programs, which has become an industry standard, is deceptive because most people assume they can only spend money they have when using debit cards.

But at Bank of America, overdrawing an account by as little as $6 currently results in a $35 fee. That charge can be applied multiple times in one day. The Charlotte, N.C.-based bank and JPMorgan Chase now say they're easing up and putting caps on such fees. More important, customers will soon have to opt into overdraft programs, rather than being automatically enrolled in them. The changes will apply to new Bank of America customers. At New York-based JPMorgan, even existing customers will have to opt in to overdraft programs.

If customers choose not sign up, it could mean an enormous loss of profits.

In 2007, banks earned about $29 billion from overdraft fees, according to Oliver Wyman, the parent company of Celent. That's more than the $28 billion consumers spent on major appliances and the $14 billion they spent on books, according to the research firm.

However, only 5 percent of customers accounted for 68 percent of revenue from overdraft fees. Meanwhile, 74 percent of customers didn't incur any overdraft fees.

Once given the choice, it's likely most people won't opt into overdraft programs, said Linda Sherry, a spokeswoman for Consumer Action, an advocacy group in Washington, D.C. But she noted that banks will probably put a new emphasis on getting people to sign up.

"There going to find new ways to push the same product," Sherry said.

The reversal on overdraft policies by banks is no coincidence.

A similar over-the-limit program for credit cards was also a target of sweeping reforms earlier this year. The new credit card law, which goes into effect in February, requires banks to give customers the choice to opt into over-the-limit programs.

That law only applies to credit cards, but lawmakers are now shifting their sights to debit cards. Last week, Sen. Christopher Dodd, D-Conn., said he plans to introduce legislation that would require customers to sign up for overdraft protection.

The response from banks was swift. The opt-in choice was only one of the changes Bank of America, JPMorgan and Wells Fargo announced this week.

Starting Oct. 19, Bank of America customers will no longer be charged overdraft fees when a customer's account is overdrawn by less than $10 a day. A $35 fee will still be levied if the account isn't brought into balance within five days.

The bank also will limit to four the number of times an overdraft fee can be charged on an account per day. That's a reversal from just this year, when the company raised that cap from five to 10. It also raised the fee this year for the first overdraft in a 12-month period to $35 from $25 -- an increase that still stands.

JPMorgan Chase says it won't charge fees when accounts are overdrawn by $5 or less. The maximum number of fees per day will be lowered to three from six.

On Wednesday, Wells Fargo & Co. also said it was changing its policy for Wells Fargo and Wachovia customers.

The San Francisco-based bank will not charge a fee if a customer overdraws an account by $5 or less, and will only charge that fee up to four times a day.

Customers will also be able to opt out of overdraft coverage.

PNC Financial also says it's lowering the fee for customers' first overdraft in a 12-month period to $25, from $31.

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