Hold Your Applause for Bank of America's Overdraft Announcement

Today, Bank of America announced its intention to end its automatic overdraft fees on debit and ATM transactions this summer. Instead of incurring a fee, the transaction will just be denied, unless a customer has chosen to opt-in* to overdraft "protection."* Bank of America's press release gloats that this shows its "commitment to provide more control, choice and clarity for its customers." Pardon my skepticism.

First, Bank of America isn't doing this by choice: the Federal Reserve had already ruled that on July 1 banks must ask customers to opt-in in order to charge overdraft fees on debit and ATM transactions. So it's really just following the law. Indeed, BofA's changes aren't taking effect until the summer -- as the new rule dictates.

Second, these millions of dollars in lost overdraft revenue will hardly just be shrugged off by bank executives. Banks' response to last spring's new credit card regulations demonstrated this fact well, as they began increasing interest rates to make up lost profits. There are two ways they could make up for the revenue lost without overdrafts: increase fees elsewhere or cut costs accordingly.

These additional fees could manifest themselves in the form of fewer people qualifying for free checking, higher maintenance fees for those without free checking or a variety of other ways. It could also signal the return of ATM fees under certain circumstances.* If we know anything about banking, it's that there's no lack of imagination when it comes to banks dreaming up new ways to extract money from customers.

Cost cutting could take a few forms. It could mean customer service representatives will be laid off or outsourced. Less productive branches could close. Whatever the method of cutting costs, some customers will likely feel it one way or another.

The winners here are those who often attempted to make unnecessary purchases exceeding their account balance. For anyone needing to make a purchase without sufficient funds, unless they have some other form of payment (or opted-in to overdraft protection), they'll be out of luck. And the costs just explained above will now be imposed on all customers, instead of just those who attempted to spend more money than what was in their account.

* Update: I just spoke to a Bank of America spokesperson who contacted me regarding this post. He asked I clarify a few things:

Finally, he wanted to make clear that Bank of America has no plans at this time to add new fees. This announcement did not allude to any new fees. I didn't mean to imply otherwise, but only theorize that banks rarely just cut their profits without trying to make them up elsewhere. And new overdraft policies like this are expected to cut into profits.

First, he wanted to differentiate between traditional overdraft fees and the service they would be offering going forward for customers who still want to be able to exceed the funds in their checking account. The old way was an overdraft fee (~$30) every time a transaction occurred that exceeded your balance. The "overdraft protection" that BOA offers is different: it will establish a link between a checking account and some other account to transfer money in order to cover the transaction. This does still involve a fee, but it will be smaller than traditional overdraft fees and cannot be incurred more than once a day.

Second, he didn't like the "opt-in" language that I used. Current BOA customers will no longer have the ability to exceed their balance, unless they request overdraft protection (which I just explained). This is different than what most banks offer, as their opt-in would still subject customers to the traditional high, every-transaction overdraft fees.