A week from today, one in 10 New Yorkers who use debit cards will be red-faced at a retail checkout counter when their cards are declined.
That’s because Aug. 15 is the kickoff day for new federal rules requiring existing bank and credit union customers to opt in for debit-card and ATM overdraft coverage — a massive change in banking regulation that many consumers have ignored or failed to notice.
The choice for customers is this: Opt in to overdraft coverage, meaning you can use your debit card even if you overdraw your account, but pay a $20-$30 penalty every time you do so. Or, don’t opt in, and your debit card will be declined if you try to spend money you don’t have.
By choosing the August date for this switch, the Federal Reserve has inadvertently set up consumers for an ugly Sunday, said economist Mike Moebs, CEO of Moebs Services. He estimates that at least 2 million metro area residents will be caught flatfooted by the change.
This date packs a double whammy because it falls in the busy back-to-school shopping season and lands smack in the middle of the monthly payroll cycle.
Since Aug. 15 is a Sunday, employers can choose to pay workers the Friday before or the Monday after. Consumers who expect payment Friday — and count on overdraft protection if they fall short — will see a nasty surprise. When employers have this kind of choice, about one-third opt to delay payday until Monday, said Moebs.
“It’s a critical time,” said Moebs. “Lots of people are going to be strapped for cash.”
After being embarrassed, people are likely to call their banks and opt in for overdraft coverage at any price, helping banks retain roughly $3 billion in revenue from non-sufficient fund charges and ATM fees, according to Moebs’ calculations.
These fees made up 6 percent of total net operating revenues earned by banks last year.
The new opt-in provision matters a lot to banks, since 41 percent of all reported non-sufficient funds transactions occurred at point-of-sale debit transactions, while 8 percent were at ATMs.
Ignorance of the new overdraft regulations is widespread. According to a June survey by the Nielsen Co., a whopping 39 percent of consumers were undecided about the coverage.
Many had “no idea there was an opt-in/opt-out option.”
Consumers are clueless despite a full-scale publicity blitz by banks. Walk past any major bank branch in the city these days, and you’ll see signs about overdraft coverage.
JPMorgan Chase, for example, has been pushing its service, which costs $34 each time a consumer uses a debit card without enough funds to back up the transaction at the end of the day.
As the minutes to deadline tick down, consumers still have a chance to choose overdraft coverage tailored to their needs.
First, it’s important to be clear about the new rules.
The opt-in requirement covers everyday debit and ATM card purchases, not recurring charges like automatic bill payments.
Lenders may still assess fees for overdrafts on checks and automatic bill payments. In addition, opting in doesn’t guarantee a bank will cover every debit-card or ATM overdraft.
Now that the Federal Reserve has given consumers a choice, bank clients need to make use of it. That means taking the time to read your lender’s fine print on overdraft coverage and make an informed choice — before loading up your shopping cart on Aug. 15. (The rules already kicked in for new bank and credit union clients last month.)
Nessa Feddis, senior counsel at the American Bankers Association, says banks are reporting high opt-in rates — more than 50 percent for some banks — among consumers who have previously used overdraft coverage. According to the Nielsen Co.’s study, well-paid managerial or white-collar workers who own their own homes were more likely to opt in. People earning less than $30,000 a year were more likely to be undecided.
Those who said they’d opt in wanted to avoid embarrassment at checkout and have a backup in case of emergency.
Since the new rules were enacted last November, 20 percent of banks have raised the price of their overdraft protection, while 6.5 percent lowered their fees, according to a Moebs Services’ survey. With average prices of overdraft charges now ranging from $24.83 to $30.02, it makes sense to shop around.
Many consumer advocates, including Consumer Reports and The Watchdog, recommend alternatives to costly bank overdraft coverage. To avoid the need in the first place, consumers should balance their checkbooks and set up low-balance alerts. A small cash cushion and linking your checking account to a savings account or credit card can help offset slip-ups.
“There are other options,” said Bill Hardekopf, CEO of lowcards.com. “Costs involved in transferring money [other ways] are usually far less than overdraft protection.”
card declined
Consumers need to be wary of next Sunday when banks change their overdraft coverage on debit cards.
What to do:
* You must opt-in for overdraft protection.
* Coverage covers everyday purchases not automatic bill payments.
* Overdraft charges range between $24 to $30 per transaction, so shop around.