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Bank of America Corp.'s plan to block debit card purchases that would overdraw accounts highlights a paradox in the market today: giving consumers fewer choices can be seen as customer-friendly.
March 10 -
Does overdraft protection have to be an all-or-nothing proposition?
March 10 -
Over at Reuters, Felix Salmon is touting another kinder, gentler version of overdraft protection that he says is standard in the U.K. There are no fees, just daily interest on the overdrawn amount. Salmon says U.K. banks treat this as a "negative balance" on customers' checking accounts. As a result, if you deposit more than that amount into your account, the overdraft automatically disappears.
March 11
Tack a $35 overdraft fee on to a $5 debit purchase at Starbucks enough times, and the cost really starts to add up — and not just for the unsuspecting caffeine addict stuck with the tab.
Banks, too, pay a heavy price for the practice, eroding good will and customer trust to the point that the bottom line is endangered, as both common sense and sophisticated market research suggest would happen.
A recent survey by the consulting firm Mercatus LLC showed that banks winning high trust scores from customers capture an average 38% of their clients' business, while the average "share of wallet" for firms with low trust scores is just 27%. Not surprisingly, the share of wallet captured by the largest banks has fallen from an average of 40% to 33% since the start of the financial crisis, and now ranks the lowest among financial services segments.
That's why Bank of America Corp.'s plan to stop authorizing purchases made against debit accounts lacking sufficient funds, instead of allowing the transactions to go through and surprising customers at the end with an overdraft charge, is exactly the type of decision that big banks should be making more of, said Bob Hedges, managing partner with Mercatus. (See
"The idea is to give up the fee revenue but increase trust," Hedges said. "You make it up in the long run with increased business from your customers."
Overdraft fees are just one area where banks are rethinking policies and service offerings as they try to win back trust.
"Anything that consumers view as nickel-and-diming kinds of fees, banks should be looking at," Hedges said. Consumers are still clamoring for clarity in product descriptions, account statements and bank processes such as check posting, he said.
With B of A upping the ante, "what we're going to have to watch," he said, "is whether other competitors similarly believe that by making decisions that improve their standing with customers, they'll be able to capture more business from them."
Susan Faulkner, the B of A executive overseeing deposits and card products, said the Charlotte company's announcement was a direct response to the three needs customers expressed most in market research conducted over the past 18 months: control, choice and clarity.
"The $40 cup of latte is gone," she said on a conference call with reporters. The policy represents a "straightforward, simple way in which we're going to help our customers with their daily finances."
Citigroup Inc. already has a similar debit policy. Consumer advocates expect more banks to feel pressure to follow suit.
"Hopefully this is leading in a direction where banks are going to have to create viable, safe products that consumers can trust, so consumers will feel like they're not being tricked and know what they're buying into when they open a bank account or a credit card," said Lauren Bowne, a staff attorney in the San Francisco office of Consumers Union.
She called the B of A move a "great step forward" that speaks to the regulatory issues being debated in Washington.
"This is exactly why we need the consumer financial protection agency," Bowne said. "B of A may be doing this for the benefit of consumers now, but they were one of the worst practitioners on these kinds of charges over the years. It took a lot for them to admit that their customers don't want overdrafts for point of sale debit transactions. We've been saying that for years."
What finally convinced B of A that the fee revenue was no longer worth the costs associated with aggravating customers and fighting an unwinnable public relations battle?
Speaking Tuesday at a Citigroup financial services investor conference, B of A Chief Executive Brian Moynihan indicated that the recession had changed customer behavior in ways that called for a response from a bank tied to hard-hit, middle-income consumers.
"Last year what we started to see happening was that as people became more paycheck-to-paycheck," they started overdrawing their accounts, Moynihan said. The accumulation of overdraft fees "was blowing them up."
New regulations going into effect this year will bar banks from authorizing purchases that cannot be covered with available balances, unless the customer has opted to pay for overdraft protection. But even that would not clear up trust-eroding disputes with customers, Moynihan said.
"They'll say they want to do it, and then when they do it, they're very upset," he said. In the inevitable follow-up call to customer service, "they would come back and say, 'I didn't mean to do it,' and that's a terrible position to put the customer in," Moynihan said.
