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Banks expected to make more money next year despite new limits on overdraft fees

September 21, 2010

By Barbara Marquand | Money Rates Columnist

Banks and credit unions lost at least $6.3 billion in 2009 and 2010 following scrutiny over debit card overdraft fees and new federal regulations requiring them to get customers to opt in for overdraft coverage, says a new study by Moebs Services, a financial research firm in Lake Bluff, Ill.

A drop in profitability due to increased regulation isn't all that surprising. But the projected comeback is. Moebs predicts that next year's revenue from overdraft fees will climb to $38 billion, the highest ever for the industry.

According to the study, banks and credit unions lost about $2 billion in revenue at the end of 2009 when, under pressure from Congressional and consumer complaints, they started putting their own lid on fees. Then they lost another $2.3 billion during the first quarter of 2010 when they introduced opt-in registration and yet another $2 billion from operational costs to meet the new federal regulations that went into effect this summer.

Those require banks to get customers' permission to cover debit card overdrafts. Before, banks covered the overdrafts automatically and charged fees, much to the surprise of some customers.

Some banks lower checking account overdraft fees

Among banks and credit unions, 6.5 percent decreased their overdraft fees, according to the Moebs study.

"We have never seen this many institutions decrease the price of a fee service in almost 30 years of tracking bank and credit union pricing," Economist and CEO Michael Moebs said in a press release. "Our data shows institutions which decreased their overdraft fees, actually maintained or increased their overall revenue in the past year."

Other banks get in the game

Meanwhile, while giants such as Bank of America and Citibank dropped their overdraft programs, community banks and credit unions started offering them for the first time.

A relatively small share of customers pay overdraft fees. In fact 90 percent of overdraft revenue comes from frequent users, Moebs said. Almost all customers with 10 or more overdrafts a year opted in to the new programs. Among all consumers, consent ranged from 60 percent to 80 percent.

Apparently the banks were right. A lot of customers really are willing to pay for the service.

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