Banks Stripped of Overdraft Penalties – New Debit Card Services Offer Protection
February 7th, 2011 | 
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The time has come for banks to put away their overdraft guns and start giving debit card customers options for their occasional overdrawing mistakes. Beginning Sunday, banks and credit unions will no longer be able to charge overdraft fees.
“For the first time in several years, customers will be able to use their debit card and ensure they don’t spend more than they have,” said Leslie Parrish, senior researcher at the Center for Responsible Lending, which works to end abusive financial practices. “There are still a lot of overdraft abuses out there, but this is really a great step forward.”
This debit card service to customers was announced by Bank of America earlier this year, but old customers did not feel the brunt of it until now. The Federal Reserve is hoping to save more than $10 billion in annual fees. In an effort to get some revenue from overdraft spending, banks are pushing their debit card services of overdraft coverage.
What is overdraft coverage?
Banks want their customers to opt-in for overdraft protection so they can still charge a small fee. Overdraft protection means that when a customer makes a purchase that overdrafts their funding, the transaction will still go through. Instead of being charged a $34 fee as an overdraft fee, the charge will come from a monetary exchange from accounts. Overdraft protection brings in money from a different account of yours (most likely a savings) to give your checking account the amount of money it needs to cover your transaction.
The Problem…
Experts like Parrish are worried that banks will be taking advantage of certain demographics that live paycheck to paycheck and target them to sign up for this overdraft protection debit card service.
“When you’re targeting this at people who frequently overdraw their accounts, and you could otherwise just decline it for no fee, you’re really threatening their financial stability,” Parrish said.
These demographics usually include customers that are lower-income, non-white, single renters. Linda Sherry, the director of national priorities for Consumer Action, a nonprofit advocacy group, says there are other, cheaper alternatives to the overdraft coverage and is encouraging bank customers to look into these other options.
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