This past Sunday, August 15th, is the effective date for existing bank customers to opt-in overdraft protection plans (new customers have to enroll in the program starting July 1st if they want the *protection*) in case their bank accounts are overdrawn. This is a requirement set by the new overdraft law which went into effective on July 1, 2010. Under the new rules, banks need to obtain permission from their customers before enrolling them into any type of overdraft protection plans. For current customers, if no action was taken by August 15th, then, by default, the transaction will simply be declined if there isn’t sufficient fund in the bank account when the account holder tries to withdraw cash from an ATM or using check or debit card to make a purchase. In the past, bank customers are automatically enrolled into overdraft protection plans.

What Is Overdraft Protection?

Overdraft protection is a service offered by banks to *protect* your bank accounts from being overdrawn when you want to withdraw cash or make a purchase but don’t have enough fund in your account. For example, let’s say that you have $100 in your bank account. If you try to withdraw $105 from your account at an ATM or use your bank’s debit card to purchase a $105 item, the bank will instead *pay* for the balance for your temporarily so the transaction can go through, but will charge you a overdraft fee for using the overdraft protection. The overdraft fee is usually somewhere around $30 at most banks.

Is Overdraft Protection Bad?

Since enrollment into overdraft protection was by default before, I assume that I must had that protection in the past. Fortunately, I never used the protection because 1) I never used debit card to make any purchase; 2) I always maintain a good level of funds in my checking account. Though I didn’t have any first hand experience, I do feel what banks do under the protection plan when the customer tries to draft more than what’s in the account doesn’t make any sense. I mean, I probably wouldn’t mind if my bank lends me $3,500 and charges me $35 for the short-term loan, but $35 fee for only $5 (as in the above example)? If I don’t have enough money in my account, then the bank should just reject the request. I can’t imagine any store would lend me $5 and let me buy the $105 product when I only have $100 in my pocket. The bank should do exactly the same.  But when the bank can collect $35 fee by lending me only $5, I don’t see any reason why they don’t want to do that either. That’s a huge profit with little or no risk.

Is The New Law Any Good?

Well, if the new overdraft rules stop banks from automatically enrolling their customers into overdraft protection plans, which they do now, so they can’t charge overdraft fees when there are not sufficient funds in the account, then yes, it’s a good law. But I have my doubt. My doubt isn’t about whether the new law protects those who pay overdraft fees or not. It’s about how it will affect those who never paid such fees.

I didn’t really pay attention to this new law, the same as I didn’t pay much attention to the credit card bill passed last year, because it has no impact on me. However, what I feel about this law is that people who watch their spendings carefully and know how much they can spend will eventually pay the price. Think about it: Overdraft fees generate billions of dollars every year for banks. Now that part of their revenues is gone, banks will need to find other ways to make up the lost income by, for example, introducing fees into what are now free checking accounts, unless a minimum daily balance is maintained, or direct deposit is set up, or a number of debit card purchase has to be made, or whatever. If you can meet these requirements, then sorry, you will have to pay a monthly fee of whatever amount, even though you never overdraft your account.

According to a FoxNews story early this year, “93 percent of overdraft fees are generated by just 14 percent of customers”, those who most likely just don’t care. And they may just be among those 26% who say they will opt-in for overdraft protection in a survey.

With the new law, many, many good customers may be negatively affected at the end. So is this really a good law?

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