Regulators Should Refrain from Over-Regulating Overdraft Services

Overdraft protection is a vital banking service used by consumers every day to ensure their families' needs are met. Banks offer this service to help consumers properly manage their deposit accounts, and consumers generally like and appreciate it. A recent Independent Community Bankers of America survey found 85.5% of consumers prefer that their financial institution pay at least one important transaction, provided a fee of an equal amount would be charged whether the transaction were paid or returned.

Despite new overdraft regulations, legislators in both chambers of Congress believe they need to impose still more restrictions on these heavily regulated services to save their constituents from the harm of occasionally overdrawing their checking accounts. Who is Washington trying to protect by targeting this consumer service?

Overdraft protection is a service that covers a shortfall in funds when a check, debit card or other transaction overdraws the account. While a fee is charged when an overdraft item is paid, it can also be a whole lot better than the alternative. Without it, customers who overdraw their checking account will incur fees, such as those for insufficient funds and returned payments. In most cases, these fees are equal to or many times greater than the fee charged for the overdraft service. Meanwhile, the bill that overdrew the account remains unpaid. Consumers who overdraft without protection might also find themselves with a nonworking debit card when they need it most. Nevertheless, consumers who would prefer not to have the debit card service can easily opt out — nobody is forced to take it.

Overdraft opponents often glaze over the fact that policymakers recently adopted significant changes to the federal rules on overdraft. In 2010, the Federal Reserve Board prohibited financial institutions from paying an item and assessing an overdraft fee on ATM or one-time debit card transactions unless certain strict conditions are met. Among them, every consumer must consent to the service after receiving a clear disclosure explaining the terms. Customers may also opt in to receiving the service or opt out at any time. These changes have resulted in greater transparency and disclosure of overdraft services.

There is little evidence that these new rules have not had their intended effect: better-informed customers able to make their own choices, utilizing the financial services they wish to use. In fact, a 2011 internal opt-in survey conducted by the Consumer Bankers Association of member banks, found an aggregated opt-in rate of only 16%. Meaning the vast majority of those surveyed had chosen not to use this service. The survey included 18 banking institutions that hold 46% of the market share of the approximately 192 million checking accounts open at the time.

Despite these consumer-focused reforms, those in Washington who want to further legislate and regulate this service give little consideration to what consumers will do if they cannot meet their short-term cash needs. The newly created Consumer Financial Protection Bureau is in the process of analyzing what, if any, concerns remain with overdraft services.

The bureau released initial findings in June and will continue to study overdraft services before making a final determination about whether additional regulation is needed. In its study, the bureau found that "overdrafts can provide consumers with needed access to funds" and nothing in their report implied that financial institutions should not offer overdraft services. The bureau should go beyond merely looking at who is assessed overdraft fees and when and also consider the more dynamic questions surrounding this issue. What will customers do if they do not have access to overdraft services? Will they go outside the banking industry to cover their short-term liquidity needs with costlier or riskier alternatives? Will they incur even greater fees due to late or unpaid bills? Will they be unable to purchase necessities? Will they really be better off?

Taking a turn in the wrong direction could have dire consequences for consumers. Policymakers should not over-regulate an already heavily regulated service and thereby drive America's families to unregulated or under-regulated industries with fewer consumer protections. We should instead preserve the right of consumers to choose the products and features that best provide for their family's daily financial needs, not force them into limited and costly alternatives. Consumers should have the choice, not Washington.

Richard Hunt is president and CEO of the Consumer Bankers Association, the national trade association for retail banking. Camden R. Fine is president and CEO of the Independent Community Bankers of America, a national trade association representing the interests of nearly 7,000 community banks of all sizes and charter types.