On July 1, Regulation E took effect for banks across the country. If you don’t know what Regulation E is, it is the new legislation that restricts banks from automatically enrolling their customers into standard overdraft plans. This means that if you charge more on your debit card than you have in your account, the bank will no longer cover the cost automatically and pass the charges on to you. Instead, the transaction simply won’t go through.
One of the benefits of the new legislation is that consumers will not be charged exorbitant overdraft charges automatically. If you want to continue to have this type of overdraft protection, however, you have to tell your bank that you still want it rather than just being in the protection plan automatically.
Analysts say this new regulation is bad news for consumers and banks alike. Banks are likely going to lose billions of dollars as a result of this new legislation because customers probably aren’t going to make the effort to enroll in the protection. Most consumers would probably prefer to have their transaction canceled rather than pay the $30 or $35 overdraft fee for each transaction. That could add up to hundreds of dollars in a matter of a day or two. This means that banks could lose about 15 percent of their annual income.
The banks are probably going to pass these losses onto the consumer. CD rates dropped by about 0.06 percent on average the day that the new legislation went into effect. Some are even saying that banks are going to lower their CD rates overall in order to make up for the lost revenue from these automatic overdraft charges. According to reports, CD rates have declined the most just since the beginning of July. Analysts expect banks to drop the CD rates by about 0.19 percent annually which should make up the $15 billion that the banks are expected to lose through the reform.
How do you feel about these new rules? Are you happy that you can have your debit card declined at the point of sale rather than pay the huge fee for a small overage? Do you invest in CDs or will the new reforms leave you unaffected overall?
Comments
Sol Nasisi
July 22, 2010
It's possible banks will try to make up fee income by cutting interest rate expense. I think it's more likely banks will find other ways to generate fee incomes - eliminating free checking, increasing minimum balance levels, etc. In a competitive market banks will find it tough to cut rates that much.
It would be interesting to know if banks dropped their rates in response to Reg E. Rates have been sliding for the past two years so a drop is nothing new.
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