Many Americans have their savings accounts set up as the overdraft protection account for their checking accounts. In case you’re not familiar with the concept, if you write a check that your checking account balance cannot cover, then the money is moved from your savings account into your checking account in order to cover the check. Using a savings account as overdraft protection prevents checks from bouncing and saves you from paying overdraft fees. In light of the new overdraft law, many big and small banks (including Bank of America) have decided to stop charging fees. In the case of Bank of America, instead of charging fees for debit card purchases when there isn’t enough money in the account to cover the purchase, they will simply decline the debit card transaction.
Federal Reserve Overdraft Law
If you haven’t heard about the new overdraft law, here’s the skinny. Effective July 1, the Federal Reserve is requiring that banks have an opt-in program in place for overdrafts. The policy requires bank customers to sign an overdraft agreement that gives the bank permission to charge an overdraft fee. If the customers does not opt-in to participate in an overdraft protection program, then any debit card purchases made from the checking or savings account would be declined if there is not enough money in the account to cover the purchase.
Community Banks Interpret the Federal Reserve Law
When the Federal Reserve announced the new overdraft law, small community banks took a good, hard look at where revenues come from. Most community banks are reporting that they’re not generating revenue from overdraft fees charged to bank customers, but rather from the business that they do with business owners – even small business owners. While many community banks have not decided how they will handle overdraft fees with the Federal Reserve law staring them in the face, most do not anticipate following in the footsteps of bigger banks such as Bank of America to eliminate debit overdrafts altogether.
Banks in Limbo Over New Law
Other community and national banks have not decided how they will handle the new overdraft law. Bank presidents such as Wayne Cottle of Dean Bank said he was waiting to decide how the bank should proceed under the new law. On the same note, most bank presidents seem to understand that it is going to be a law that has a pretty drastic effect on the bank’s stream of revenue. Banks are still shaking from the downturn in the economy, so the new overdraft law is not something they are taking on with open arms.
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