The End of Free Checking?

Oftentimes the most well-intentioned legislation has unforeseen and negative consequences.  That appears to be the case with H.R. 1456, The Consumer Overdraft Protection Fair Practices Act. 

Introduced by Rep. Carolyn Maloney (D-NY), the bill would provide consumers with protection against unfair banking practices that are designed to maximize the number of overdraft charges and gouge consumers. 

However, the bill may also spell the end of the free checking account, according to CNNMoney.com.   

“Bank customers used to the perks of free checking accounts — unlimited check writing, online banking, debit card use and ATM access, to name a few — might have to recalibrate their expectations soon,” writes Ismat Sarah Mangla.   

Banks can afford to offer free checking accounts because they are subsidized with the fees from overdraft charges.   

Overdrafting has turned into a multi-billion dollar enterprise for the baking sector, oftentimes by means that are unethical at best. According to The Center for Responsible Lending, overdraft charges generated $17.5 billion for banks in 2007, up 70 percent in 2004 when banks generated $10.3 billion.  

Banks have achieved this amazing growth in overdraft charges by automatically enrolling customers without their knowledge, juggling transactions to increase the frequency of overdrafts and not providing any warning to customers that an account is near being overdrafted. According to the Federal Deposit Insurance Corporation, 75 percent of banking customers are automatically enrolled in overdraft protection programs.  

The Maloney bill would seek to curtail the banks' ability to unknowingly charge consumers such high fees.  

First, the bill would require customer consent before banks can provide overdraft protection and would put overdraft loans under the oversight of the Truth in Lending Act. Second, the bill would prevent banks from juggling the order of transactions to increase the frequency of overdrafts and therefore maximize the amount of fees gained. Finally, the bill would require banks to inform customers that a transaction could trigger an overdraft and would provide customers with an opportunity to cancel the transaction.  

The bill could also result in a lot of collateral damage for banking customers - the vast majority of whom have no problem with overdrafting their bank accounts.   

According to a May study by consulting firm Oliver Wyman, 68 percent of all overdraft and insufficient fund fees are accumulated by just five percent of banking customers.  The study also found that 74 percent of banking customers pay no overdraft fees at all. 

Those 74 percent of banking customers could soon be asked to pick up the slack for the small minority of those customers who frequently overdraft.   

“The industry has to change pretty dramatically because a substantial amount of the revenue that paid for free checking is likely to go away,” Aaron Fine, author of the Oliver Wyman report, recently told banking industry trade publication American Banker. “That business model is not sustainable.” 

Donate Today