MOUNT VERNON — The Federal Reserve System has established new rules for how banks and credit unions handle overdraft protection for customers.
Overdraft protection programs are established to protect account holders if a transaction exceeds the available cash in the account. The plan insures that the transaction will go through. Standard overdraft plan may charge a fee for each item that overdraws the account. With other plans, such as an overdraft line of credit or a plan that links to a savings account, transactions will be covered and a fee may also be charged.
In the past, when opening a personal debit account, overdraft protection was initially provided by financial institutions. With this new regulation customers must choose to opt in or decline the overdraft protection.
“If you have a health club membership and use your debit card to pay for it, it’s treated more like a check than a debit card transaction, so its not effected by this. The regulation is only those one-time purchases,” said Kelly Schermerhorn, CEO of CES Credit Union.
The regulation went into effect in two phases: The first phase occurred in July for new customers, giving them the option to immediately opt in or decline overdraft protection at account opening. The second phase began in August for preexisting customers, whose existing overdraft protection was nullified by the new regulation, now must opt in or out of the program.
“Truly, customers have always had that option here to opt in or out. They don’t have to participate in the courtesy overdraft protection; many want to, but they don’t have to,” said Vickie Sant, executive vice president of First-Knox National Bank.
Schermerhorn explained this regulation has both short- and long-term effects.
“From the consumer standpoint, on the short term, it might mean nothing because if a significant number of people view overdraft protection as a valuable service, they opt in and it becomes a non-issue,” he said. “If a significant number of people do not sign up [for the overdraft protection program] either because they don’t understand or ... because they don’t like it, the program will eventually go away.”
Though the overdraft protection program has received some “negative” publicity, Sant said, the program is meant to benefit the person using it, not hurt them.
“A vast majority of the customers never use it and it doesn’t cost them a penny,” said Schermerhorn.
It doesn’t cost customers to have the overdraft protection, but for those that use it, there are fees on overdraft transactions. For those customers that decline the overdraft protection program, transactions over the amount will be declined and the customer will not be charged a fee.
“For customers that never overdrew their account, they may not realize that it impacts them and may not opt in as a result,” said Sant. “But it will impact them at the point of sale if they are denied because we won’t have the authorization to allow their sale.”
Sant gave the example of making purchases with a debit card just prior to automatic payroll deposits and/or other deposits. In the past, banks would allow such transactions to go through until the deposit posted to the account. Banks must now prohibit transactions unless the account holder has opted in to an overdraft protection program.
“This program does not cost you a thing unless you use it, and even if you use it in the case of your transaction post and your deposit doesn’t come until tomorrow morning, it doesn’t cost you anything unless you overdraw your account,” said Sant.
But for those customers who have, in the past, made a mistake calculating a checkbook, forgot to account for an ATM withdrawal, or haven’t balanced their account, said Schermerhorn, it is a valuable protection.
“It’s a service and like any other service those people who use it and appreciate it understand its value to them,” he said.
Many financial institutions have taken the initiative to actively educate its members and new customers on overdraft protection options available to them, as well as inform them of the new regulation in effect.
“We have spent a lot of time trying to educate our members in understanding their options: The overdraft protection program and the overdraft line of credit both of which, in essence, serve the same function,” said Schermerhorn.
“We’ve communicated extensively with our customers. For us, we have about 18,000 personal checking accounts and this just affects personal accounts, not business accounts, and we’ve communicated with all of them and had notices posted at our ATM screens, on bank statements and sent letters,” said Sant.