You’ve probably heard in the news recently about the new overdraft protection opt-in requirement for account holders at banks and credit unions. Undoubtedly, you have been urged by some commentator on the national news network of your choice about the importance of not opting in. Before you jump on this bandwagon, read this article.
First, here’s a brief summary of how overdraft protection works… Let’s say John Smith has $100 in his account. If a $150 item – whether it is a check, ACH debit (electronic payment), ATM withdrawal, or debit card purchase – tries to clear John’s account, there isn’t enough money, therefore the transaction is denied. If John was enrolled in a program where he had overdraft protection, the $150 item would be paid, and John would be charged a fee for this service (the fee would most likely be much higher from a bank than a credit union…cheap shot, I know…just kidding, banker friends).
Ok, so now that you know the basics, let’s compare overdraft protection as it exists now with overdraft protection as it will exist during the second half of 2010.
Currently, financial institutions can offer this service to their members as a privilege, without making them sign anything in addition to the normal paperwork required at account opening. Many of you who are reading this, whether you know it or not, have overdraft protection of some sort with your bank or credit union. At SIU Credit Union, if your account has been opened for 30 days or more, and you are a member in good standing, you have Privilege Pay. If you try to make a purchase with your debit card, and you don’t have enough available funds in your account, we will allow the transaction to go through and will subsequently charge a $27 fee for the service.
Recent amendments to Regulation E, the regulation which carries out the requirements of the Electronic Funds Transfer Act, will significantly change existing overdraft protection programs. The amendments apply only to ATM withdrawals and one-time debit transactions and will prevent a bank or credit union from charging a fee when the protection is used unless the consumer affirmatively agrees to enroll in the program. So, unless consumers opt in, they will not be able to make ATM withdrawals or debit purchases if there are insufficient funds in the account.
Many consumer groups are urging the public not to opt in. At first glance, this looks like the best option…consumers can avoid fees and shouldn’t spend more than what they have. However, this narrow view fails to look at the whole picture. So, before you curse the existence of overdraft protection, consider the following. What happens when our John Smith from above is in line at the grocery store, buying groceries to feed his family, and his transaction is denied? Not only is John embarrassed because his next door neighbor is two spots behind him in line, but he has no way to provide food for his family. Or maybe John has paid all of his bills for the month, has plenty of food in the house, has $1.50 left in his account before payday, and his child gets sick. John goes to the drug store to pick up the prescription, swipes his debit card, and it is denied. These are real-life situations that could have been prevented if John had overdraft protection. Many opponents would respond with the fact that John could write a check in either scenario, since checks aren’t affected by the new amendments. John could in deed write a check, and assuming his bank or credit union offered him overdraft protection, the check would be paid and John would pay the appropriate fee. However, John would also pay a returned check fee to the grocery store or drug store. I’m sure if John were given the options of (1) using his debit card and paying a $27 overdraft protection fee to buy the medicine or (2) paying a $27 overdraft protection fee plus a returned check fee to the drug store to buy the medicine, John would choose option (1). But in a few short months, John won’t have this option unless he chooses to opt in to overdraft protection.
I am in no way suggesting that individuals should opt in so they can carelessly use their debit cards without knowing how much money is actually in their account. Nor am I saying that you should opt in just in case you want that designer purse prior to payday. Spend wisely. But also prepare for the unexpected. Have the service available for yourself for those times when you may have no other option.
— Amy Ragan, JD
Compliance Officer / Internal Auditor
SIU Credit Union