Second Chance Checking Accounts are checking accounts developed by institutions for people who have struggled in the past and are maybe on Chexsystems or have a poor credit score.  Typically second chance checking accounts aren’t quite as lenient as regular checking accounts and may have some downsides.  For example, some second chance checking accounts charge a monthly fee and then restrict services.  These second chance checking accounts still charge overdraft fees and typically do NOT provide an overdraft limit, which many times is what caused problems for customers to begin with.

Those who are unable to qualify for second chance checking accounts will often go the route of prepaid debit cards.  These services sound like a great fix on the front side but when you dig deeper you realize that they charge fees for anything and everything.  These accounts will usually charge you a fee to use the card, speak to a person about your card, check your balance and anything else they can find to charge you for.  By the time all is said and done you’ve spent half of the money you put on your prepaid card on fees.  This option is worse for the customer than second chance checking accounts.

“One example is overdraft protection plans.  These are a form of consumer credit, and consumers often use them as substitutes for other forms of credit such as payday loans, credit card cash advances, and traditional overdraft lines of credit.  However, overdraft protection plans have not been regulated as credit, and as a result, consumers may not overtly think of the plans as credit.  Consumers may not, therefore, take the same care in their use of overdrafts that they take with other, more overt credit products.  The CFPA would be authorized by existing statutes to regulate overdraft protection more like a credit product, with Truth in Lending disclosures as appropriate.  The CFPA could also prohibit charging for overdraft coverage under a plan unless the consumer has “opted in” to the plan, just as the Credit CARD Act prohibits over-the-limit fees unless the consumer as “opted in” to over-the-limit coverage.  It could also require affirmative consent at point of sale with debit transactions or at an ATM machine before collecting an ‘overdraft fee’.”

This basically translates into the same push for regulation that I’ve discussed in this blog post.  Regulation would require the customer to “opt in” to the overdraft program, rather than being automatically signed up like customers are currently.  The overdraft programs would also be required to alert you at the ATM and POS (point of sale) when you are going to overdraft your account.

Off the bat, these all sound like excellent ideas and complete improvements to the current system.  These changes, however, could have unforeseen consequences which you can read about in my Lesser of Evils post.

In actuality, this new legislation may lead to the biggest surprise of all; the end of free checking.  How you ask?  Nearly one quarter to one third of a typical bank’s net income is from fees gained from overdrafts.    The average net operating income of the banking industry from March of 2004-March of 2008 was $30.5 billion*.  Income from overdraft fees across the banking industry was estimated at $17.5 billion**.  That’s quite a significant chunk of income that will wither and die when new legislation is enacted.  Banks will have to somehow cushion the hit taken by this and the only feasible alternative would be to add a fee back into the checking account pool.  Here we get to the heart of the problem; do we hate overdraft fees more or do we hate fee based checking accounts more?

So now you’re wondering how much longer you will be able to enjoy your free checking account aren’t you?  Don’t worry too hard.  For starters, it will be at least a year after legislation is enacted before the banking industry will be able to change.  The technology for POS machines to check your account and offer you the option to decline an overdraft is only owned by a few institutions and isn’t ready for widespread use.  This alone will cost the banking industry millions of dollars and involve a complete overhaul of the way most of these systems interact with your bank.  Secondly, and more importantly, we don’t know exactly how this legislation will be worded and therefore, how exactly it will affect the banking industry and overdraft income.  With the current state of the banking industry (after the mortgage crisis), Congress will tread lightly in areas that will further cripple the industry for the time being.  All that to say, we’ll just have to see what happens.  In the meantime I will continue to post tips and tricks for helping you avoid overdrafts and help you get money back in the event you do slip up.

* Information found at FDIC’s website: http://www2.fdic.gov/qbp/grtable.asp?rptdate=2008dec&selgr=QNIQB1

** Information found at Center for Responsible Lending:  http://www.responsiblelending.org/overdraft-loans/policy-legislation/congress/support-h-r-1456.html