Maybe Mobile Alerts Would Help?

The other day, I received a press release from the New York City Department of Consumer Affairs (DCA) informing me that the commissioner for consumer affairs, Jonathan Mintz, was calling for drastic reform to bank overdraft protection.In the release, they call the "courtesy" overdraft protection offered by banks to their customers costly and even sneaky (not their word, but that seemed to be the gist of what was being said). Mintz formally submitted recommendations to the Board of Governors of the Federal Reserve System on behalf of New York City consumers to "demand the elimination of automatic enrollment into overdraft protection programs by implementing real-time, opt-in opportunities to make overdraft choices at point-of-sale transactions."

Mintz claims the banks are pushing this service on unsuspecting customers and that most consumers don't even realize they're overdrawing on their accounts until it's too late and they're slapped with the overdraft protection fee. "On average, consumers overdraw their accounts on debit transactions valued at about $20, yet incur a median $27 'courtesy' overdraft fee for a transaction they may have declined if they were not locked into automatic overdraft protection," says the release.

I'm not going to take sides here, but one has to think Mintz timed his crusade just right. Banks are in enough hot water right now. Why not add more fuel to the fire? Still, I'm sure there are a good deal of consumers who are not only unaware of how overdraft protection works, but also may not even realize they have it until it's too late.

In spite of all the rhetoric for or against overdraft protection, the release does make an interesting point about the impact of such fees on the underbanked. It says the DCA's Office of Financial Empowerment's (OFE) Neighborhood Financial Services Study found that "the high cost and unpredictability of overdraft fees can drive consumers, especially those with low incomes, away from banking relationships. OFE's research also found that one in four checking account holders had overdrawn their accounts at least once in the last few months. The 31 percent of survey respondents who were unbanked cited excessive fees as the most common reason they avoided mainstream banking."

What a great opportunity for banks to push something else: mobile alerts. The technology exists. People can set thresholds so that the bank automatically alerts them when their balance falls below a certain amount. Then the consumer would have a much better idea as to whether he should purchase something or not. Not only is this a great fit for the underbanked, who tend to favor the use of cell phones, but for the general banking population as they seek to get a better handle on their finances in these shaky times.

Mintz goes on to list several proposals he says will make the practice of offering overdraft protection more fair, such as having consumer opt in to overdraft coverage for one-time ATM and debit transactions, while making overdrafts caused by check, ACH transactions and recurring debit transactions be defaulted to opt out, "given that these overdrafts may generally be in consumers' best interest due to the fees associated with bouncing a check or failing to pay a bill in a timely way." He also says consumer should be notified if a transaction will result in a negative account balance and given the opportunity to choose whether to accept the overdraft fee.