Will Bank of America's overdraft fee turnaround spark a trend?

Starting this summer,  Bank of America will eliminate overdraft fees for debit card purchases by rejecting any transactions at the cash register that exceed a customer's account balance.

The bank's move goes a step beyond new Federal Reserve rules that also kick in this summer requiring banks to obtain customers' permission before charging overdraft fees for debit or ATM transactions that would exceed their balance. 
 
It's also quite a contrast from overdraft policy changes Bank of America introduced last summer, when it began charging  $35 "sustained overdraft" fees on top of the initial $35 penalty.

Even after the bank modified its rules last fall so that overdraft fees would only be charged when a customer was more than $10 overdrawn, the penalties still could add up to $280 for a $11 overdraft that any wasn't repaid within five days.

When we asked the reason for this latest turnaround, Bank of America's Susan Faulkner said the bank conducted an 18-month long research project revealing that the majority of the bank's customers who incurred overdraft fees did so inadvertently for everyday debit purchases, and their feelings about this came through loud and clear.   "Our consumers told us directly,  ‘Don't let us spend money we don't have,' she said.  "It's about establishing trust with our customers."

Of course, rejecting charges that exceed a customers' account balance used to be standard operating procedure for banks. Over the past decade, however, the majority of banks began putting such charges through and hitting customers with ever-rising penalty fees in return, even if they hadn't requested overdraft privileges or agreed to the high fees that accompany them. An unusual exception is Citibank, which never has allowed overdrafts for ATM or debit point-of-sale transactions, though it does charge penalty fees for checks that bounce.

For most banks, though overdraft fees have become an increasingly important stream of income, with consumers last year paying around $38 billion in overdraft charges, with debit card and ATM overdraft fees accounting for $20.1 billion of that total, according to Moebs Services, an economic research firm.

Overdraft policies for major banks are conveniently spelled out in recent Consumer Federation of America research, which also dispels the notion that overdraft fees are only racked up by deadbeats.

"Instead of launching a hard-sell campaign to persuade its customers to opt-in to the most expensive form of overdraft coverage, Bank of America has correctly decided to simply deny debit card purchases on insufficient funds. Other banks should follow their lead," says Jean Ann Fox, CFA's director of financial services.

"This good for consumers and it is time for the other banks to follow," said Gail Hillebrand, financial services campaign manager for Consumers Union, publisher of Consumer Reports.

Whether other banks do so remains to be seen. "No comment from Chase," was the response from Thomas A. Kelly, spokesperson for JPMorgan Chase. Wells Fargo indicated it is planning some overdraft policy changes, but won't disclose details. "We're getting ready to share our plan with team members first so they can be prepared to help our customers," said Wells Fargo's Richele J. Messick.—Andrea Rock