Consumers who use ATMs and debit cards (and who doesn’t these days?) should applaud a new rule announced Thursday by the Federal Reserve.
The rule, which takes effect July 1, would require banks to give their customers the option of not applying overdraft protection to their debit or ATM transactions. Currently, many banks allow such transactions to go through even if there is not enough money in the customer’s account to cover the purchase or withdrawal. The result is that the account is overdrawn and banks then can charge a fee of $25 or $35 for the overdraft. So, someone may use a debit card to buy a $5 coffee and incur a $25 or $35 fee because they were unaware they were overdrawing their account.
The new rule would give customers the option of continuing that kind of overdraft protection or having the bank simply deny any transaction that exceeds their account balance. The rule would apply only to ATM and debit card transactions, not to checks or automatic bill payments.
It’s certainly arguable that it’s a customer’s responsibility to keep track of his or her account balance and avoid overdraft fees. However, banks tout the use of debit cards as a convenient alternative to cash, and we would hate to think that they are at all motivated by the fact that they can benefit from those cards by automatically creating an overdraft — and an accompanying fee — without notifying the customer.
The current overdraft fees on debit cards probably are borne disproportionately by young people or others who don’t maintain large bank account balances. This rule, which was heavily supported by consumer groups, will allow them to have an automatic check on their spending. Although many larger banks already are following this policy, the new rule will require smaller banks to follow suit.
If customers would rather pay the overdraft fees than have their card denied, that is their choice, but we suspect, given the option, most people would rather not have their $5 coffee turn into a $30 or $40 purchase after their bank adds an overdraft charge.