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
