Bank of America customers will soon be unable to spend more than they have in the accounts linked to their debit cards. It's a step that may become a common move ahead of new regulations limiting overdraft fees.
Rules set by the Federal Reserve that will ban banks from charging such fees, without first getting permission from the customer, are set to take effect July 1.
But Bank of America is going a step further than the regulations require. It will simply no longer allow debit card purchases to go through if there isn't enough money in the account.
For ATM transactions, customers who try to withdraw more than their balance will have to agree to pay a $35 overdraft fee before they can get the money.
"The majority of our customers who overdraw their account do so with everyday debit purchases," said Susan Faulkner, senior vice president of consumer banking for Charlotte, N.C.-based Bank of America. "They're doing this unknowingly, because they aren't aware that they are about to overdraft."
Since the bank doesn't have the ability to notify the customer when they're at the register and give them the chance to agree to a fee, it will simply reject such transactions.
Consumers have demonstrated a willingness to pay overdrafts for covering the mortgage and the car payment, said Greg McBride, who follows the banking industry for Bankrate.com. "But not if it's things like covering a latte and a scone."
The bank's new policy will kick in on June 19 for new accounts, and in early August for existing accounts. It will replace the bank's current terms, which allow overdrafts to go through but only charge a fee if the deficit is greater than $10.
Bank of America is the first big bank to announce such a change, but it likely won't be the last. That's because while the new rules will save consumers from surprising dings on their accounts, they will also cut deeply into the more than $1.77 billion annual revenue overdraft fees generate for the banking industry.
Faulkner would not estimate how much such fees pulled in for Bank of America in the past.
The Federal Deposit Insurance Corp. estimates about 41 percent of that total is from point-of-sale debit transactions. About 8 percent was from ATM transactions. The rest were from bad checks and online bill payments, which are not addressed in the regulation.
What's more, 93 percent of overdraft fees are generated by just 14 percent of customers.
Because most of the fees were paid by what Robert Meara, a banking analyst with the consultant Celent, called "serial overdrafters," the rules may not save the average consumer much money. In fact, because banks will look to make up that lost revenue, it may actually cost most individuals more.
"What this may do really is produce the unintended consequence of creating the demise of free checking," said Meara. Banks jumped into free checking in the last decade because of competition, but at the same time started allowing overdrafts that generated huge sums. If they can't charge those fees, it's likely they won't offer the free products anymore either.
Or, he suggested, consumers might start seeing deals advertised where free checking kicks in after a certain number of transactions, or if a customer has several accounts linked together.
"I think banks will use this as an opportunity to be creative and differentiate themselves in ways that was really hard to do when everybody had a free checking account," Meara said. "There's a way this can be a win-win for everybody, but in the short term I think it's going to be challenging for banks to make up for that lost revenue."