This spring, while away at college, my son racked up $278 in bank overdraft fees on his debit card account. The actual charges were relatively small, $10 here, $20 there and before he knew it, he had a financial train wreck on his hands. The bank charged $39 for each overdraft that it paid and an additional $39 for each day the account was overdrawn. We suspended the account and because we had a relationship with the bank, the total fees were reduced. We then wired his monthly spending money to him through Walmart.
I asked the question, “Why can’t the bank just deny the debit transaction when his balance is too low, instead of just piling on fees?” The answer I got was, “the system cannot do it!” Well, that is about to change with new modifications to the Electronic Funds Transfer Act, commonly referred to as Regulation E.
What is Regulation E?
Regulation E is a federal regulation that governs the electronic transfer of money. Recent changes that that went into effect, July 1, 2010, modify a bank’s ability to assess overdraft fees on ATM and debit card transactions. If a customer attempts to make a transaction that will result in an overdraft, the bank will decline the transaction at the point of sale and the customer will be spared the automatic overdraft fee. The purpose of the changes to Regulation E is to help protect consumers from excessive fees that they were being charged.
“Banks made a tremendous amount of money—over $38 billion from overdraft and NSF fees in 2009,” according to Michael Flores, CEO of Bretton Woods Inc., an independent banking industry research firm. “The national annual non-sufficient fund/overdraft per household with checking accounts increased from $343 in 2008 to $376 in 2009, a 10 percent increase.”
Money is changing
The next time you are standing in line at a local retailer—grocery store, drugstore, etc., observe how many people pay for their transactions with cash or check and how many pay with a plastic bank card, either credit or debit. Debit card use has surpassed credit cards and according to a December, 2009 Nilson Report, “There were 34 billion U.S. debit card transactions in 2008, totaling $1.33 trillion, up from $16.1 billion transactions totaling $583 billion in 2003.”
Also, while you are making your observation, note how many people write down how much they spent with their debit card or kept track of the amount in some way. Money has gone from precious metals to paper and now to plastic. It is easier to spend and even overspend when there is a lack of perceived value.
The changes to Regulation E will provide a first line of defense from excessive overdraft charges, however there are still some pitfalls to avoid:
Do not authorize your bank to pay ATM or debit card transaction overdrafts.
This is called the “opt-in” option and will again expose your account to overdraft fees.
Keep track of your debit card spending, just as you should with a checking account by recording your transactions and making sure that you have a positive balance.
Set up account balance alerts through e-mail or your mobile telephone, when your account balance is below a predetermined level.
If you must have overdraft protection on your debit card account, work with your bank to establish a personal line of credit or an automatic transfer from another account to cover your overdrafts.
Finally, the changes to Regulation E only cover overdrafts from ATM and debit card transactions. You may still be charged overdraft fees for checks and automatic bill payments.
Some banks have begun to eliminate “free checking” accounts, so it may be necessary to re-evaluate your checking/debit account needs and then find a bank that offers a product that meets your needs at a reasonable cost.
(Michael G. Shinn, CFP, registered representative of securities and investment advisory services offered through Financial Network Investment Corp., member SIPC. Visit http://www.shinnfinancial.com for more information or to send your comments or questions to firstname.lastname@example.org.)