Debit Card Overdrafts: More Term Substitution

by on March 10, 2010 · 0 comments

An Associated Press story this morning by Eileen AJ Connelly provides our latest example of Regulatory Whak-A-Mole, known to scholars as “term substitution.” 

Bank of America announced that it will discontinue charging overdraft fees on debit cards. This comes in response to new regulations that prohibit banks from charging overdraft fees unless the consumer has consented to the fee.  Since the bank has no way of getting your consent when you walk into Starbucks and perpetrate an overdraft while buying your latte macho grande and muffin, it simply won’t let the transaction go through.

Wa-Hoo, another victory for consumers. Well, not quite. Customers who place a high value on not being embarrassed in Starbucks are arguably worse off. (How do you return a latte macho grande if you find out you don’t have enough money to pay for it after your coffee concierge has mixed it?) More seriously, customers who might want to use an overdraft for a more substantial purchase will no longer have this option.

I wonder about the argument that regulators are saving hapless, uninformed consumers. The AP article reveals that 93 percent of overdraft fees are generated by 14 percent of customers — “serial overdrafters.” That means there are a lot of folks out there who repeatedly try to use their debit cards as a source of credit, albeit an expensive one. I don’t know about you, but it would only take one or two overdraft fees before I’d realize it’s cheaper to keep a $25 balance in my account than to pay more than that in multiple overdraft fees. If most overdrafters have done this more than once, they must know they will be charged a fee and have decided that’s the lesser of multiple evils. So why take this choice away from them?

Point-of-sale overdrafts may not be the only casualty of this regulation. The article quotes banking analyst Robert Meara’s prediction that banks might curtail free checking, which many apparently offer as a loss leader to generate fee income. A smaller stream of fee income makes “free checking” less attractive for banks.

Which consumers does this ultimately hurt? I can think of one group: people with low incomes who can’t afford checking account fees and  use debit cards responsibly.  

Somehow I doubt that was the regulators’ intention.

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