Regulation E May Mean Fewer Overdraft Fees, More Payday Loans

Effective July 1, a new federal banking law, Regulation E, will require banks to notify customers when an ATM or debit-card transaction will result in an overdraft or insufficient funds fee. Once the regulation takes effect, banks and credit unions will not be able to pay debit-card and ATM overdraft transactions without allowing the customer to opt out at the time of the transaction, or to opt in by agreeing ahead of time that the financial institution will pay items into overdraft. One effect of the new law may be to encourage cash-strapped consumers to apply for online cash advances, which are generally much less expensive than overdraft fees.

Bretton Woods report tracks overdraft fees

According to a recent Associated Press release and a related article on, a new report by Bretton Woods Inc., a bank strategy and consulting firm that has been tracking and recording bank fees since 1998, shows that in 2009 the average U.S. household with a bank account paid overdraft and insufficient funds fees on ATM or debit-card purchases 12.7 times, for a total average cost of $376. That’s a 7% increase over the year before, when the average household incurred such fees 11.9 times, for a total average cost of $343. The full Bretton Woods report can be read online at

Overdraft fees are a major source of bank revenue

For anyone who’s ever made a $4 purchase with a debit card only to discover after the fact that the transaction cost more like $34, Regulation E is good news. But for the banks and credit unions that generated more than $38 billion in overdraft and non-sufficient funds fees in 2009, (10% more than 2008 and 27% more than 2005) Regulation E threatens to erode the bottom line significantly.  Bretton Woods predicts that in 2010 Regulation E will decrease Bank revenues from overdraft and insufficient-funds fees by at least $7.3 billion.

Overdraft fees have risen consistently for several years

According to the Associated Press release, overdraft fees have been rising consistently for several years, and reached an all-time high average of $29.58 in 2009. Between the years 2005 and 2009, not only did the average overdraft fee increase, the number of debits presented against insufficient funds increased by 18% for a total of 1.3 billion debits

Overdraft protection is a form of short-term consumer credit

Overdraft protection is a form of short-term consumer credit, in essence automatic loans to cover overdrafts. Of course, when it happens to you, overdraft protection may not feel at all like a credit transaction. Overdraft protection may feel more like punishment — a fine of sorts, especially when the overdraft in question is a very small amount and is promptly covered by a payroll or other deposit to your account — but when a bank pays an overdraft and charges you a fee for doing so, the transaction is a lending transaction, however brief and expensive it may be.

Regulation E will affect consumer credit as well as bank revenues

Bretton Woods predicts that short-term consumer loans in the form of overdraft protection on ATM and debit-card transactions will be reduced by $6.3 billion in 2010. Both the Associated Press and BusinessWire quote Bretton Woods CEO Michael Flores as saying that “Once Regulation E goes into effect, consumers will have to opt-into these fees. Banks will struggle to recover that revenue and consumers will need to replace $6.3 billion in short-term credit.”

Consumers will turn to payday loans and banks will find another way

For consumers facing short-term cash shortages, payday loans are the most likely financing alternative to overdraft protection. According to BusinessWire, the Bretton Woods report shows that households in states where payday cash advances are permitted pay up to 13% less in overdraft and insufficient fund fees than households in states where such loans are prohibited. Banks, on the other hand, have proved themselves very adept at finding new ways to assess fees.  There can be little doubt that once Regulation E takes effect, banks will come up with other creative ways to pad the bottom line.

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