The latest missile out of Washington as it pertains to bank practices and consumer discontent relates to restrictions on bank overdraft policies. The discontent centers around the ways that banks have rolled out overdraft "services" and fees that have resulted in overdraft charges becoming an estimated $38 billion revenue source for the industry's fee-starved payments portfolio. In fact, complaints about such practices are moving into the court system across America, even as Washington attempts to address the issue from a legal/regulatory standpoint.
In November 2009, the Fed issued a new regulation that would require banks to fully disclose overdraft policies and gain specific consent from consumers to charge fees for ATM- or debit card-based overdrafts that the bank pays. These rules go into effect later this year. Meanwhile, some members of Congress who are not satisfied with the extent of the Fed ruling are proposing more restrictive legislation that may also specify the order in which transactions are applied to the account balance, limit the number of overdraft charges in a period, and possibly extend restrictions to other types of overdrafts, such as those stemming from check writing.
In the wake of these moves, Bank of America (B of A) announced that it would change its policies on ATM and debit card transactions to a default mode whereby the bank will reject such online transactions if the account balance is insufficient to cover the charge. In other words, customers can select offered overdraft services and associated fees if they want to avoid having transactions rejected, but if they don't opt in, the bank will reject overdraft transactions. Now, I must admit that I naively thought that absent my enrollment in a specific overdraft plan, any ATM or online debit card transaction that I initiated that overdrew my account would automatically be rejected. I don't have the money—enough said! Apparently, I was wrong by several billion dollars. I applaud the move that B of A is taking, and they will apparently join Citibank with this stance.
How fraud figures in
While the focus of all this turmoil has been on the avoidance of exaggerated fees, I began to consider the overdraft issue from a personal perspective. What approach to overdraft would be best for me, given my income and lifestyle? More specifically, what would also be the best option given the various types of payments fraud and ID theft we hear about every day on the news? In other words, could my choice as a consumer on overdraft plans better protect me from fraud or thwart the efforts of those bad actors intent on stealing my money?
We have all heard stories about fraudsters skimming card numbers at ATMs using a special device inserted into the card reader slot. We know that databases containing account information have been compromised. We also know that crooks are creating counterfeit checks. Similarly, fraud schemes have been documented that involve remotely created checks and transactions that flow through the ACH and wire transfer networks. So, the source of a fraudulent transaction can come from many payment channels.
Of course, I realize that overdraft services have no effect on detecting or rejecting fraudulent transactions if I have sufficient funds in the account to cover the transaction. If, however, I do not keep excessive balances on hand and if a crook acts reasonably by trying to make a fraudulent transaction worthwhile (a few hundred dollars as opposed to a few dollars), it is not unreasonable to think that a fraudulent transaction could overdraft an account. If an overdraft plan is in place, the transaction would go through, the balance would be covered from another source, and I may be charged a potentially significant overdraft fee. I would then appeal the fee by claiming the item that caused the overdraft was fraudulent. In the case of an electronic transaction consistent with the protections afforded by Reg E, I could also return the item as unauthorized and recoup my funds.
On the other hand, if I selected the default practice being implemented by B of A, the bank would reject the fraudulent item if it promised to overdraw my account. I may not be charged a fee, and no paperwork is in my future. Further, in the case of an online transaction, the crook would be frustrated when the transaction is disallowed. Of course, I would have to bear the stigma of embarrassment if I institute a transaction at the point of sale that does overdraft my account because I am a terrible bookkeeper and I have not enrolled in the protection plan. But on balance, I am willing to risk that infrequent possibility as a tradeoff for the similarly infrequent possibility that I might frustrate a criminal. Other folks who are forced to live paycheck to paycheck may be better served by opting into an overdraft program, but everyone should make this decision in light of not only their personal financial situation but also the reality of payments fraud. The bottom line is to consider whether the choice you make on overdraft plans may have a collateral benefit in the area of fraud protection.
By Rich Oliver, executive vice president, FRB Atlanta's Retail Payments Risk Forum