Bank officials said that effective this summer, customers who try to make purchases with their debit cards without enough money in their checking accounts will simply be declined. Debit purchases account for roughly 60 percent of overdrafts at Bank of America, the nation’s largest issuer of debit cards.
Banks are bracing for a new federal rule that will require them to get permission from account holders before providing overdraft services for debit purchases and A.T.M. withdrawals. That change was already expected to wipe out billions of dollars in overdraft revenue for the banks.
“What our customers kept telling me is ‘just don’t let me spend money that I don’t have,’ ” said Susan Faulkner, the bank’s deposit and card product executive, who said the overdraft changes were part of a broader push to build trust among its customers. “We wanted to help them avoid those unexpected overdraft fees.”
The bank will continue to provide overdraft protection, for a fee, for checks and automatic payments, say to a biller that debits money from an account each month. Consumers who try to exceed their balance when making an A.T.M. withdrawal are already being notified that they will be charged a $35 overdraft fee if they choose to proceed.
There has been considerable consumer and political outcry against overdraft fees on deposit accounts. Over the last decade, the fees have become a major source of revenue for banks as they realized they could make more money by covering consumer overdrafts, offering a short-term loan for a fee, than in denying them.
Last year alone, banks generated about $20 billion from overdraft fees on debit purchases and A.T.M. transactions, and $12 billion more by covering checks and recurring bills, according to Moebs Services, an economic research firm.
But as reports surfaced of customers incurring hundreds, even thousands, in overdraft fees, often for purchases of just a few dollars like a cup of coffee, regulators and lawmakers stepped in. As of July 1, the Federal Reserve will require that banks obtain a customer’s consent before they can charge them overdraft fees for A.T.M. transactions and debit purchases; many banks now automatically enroll customers.
In anticipation of the new Fed rule, some banks have begun marketing campaigns to encourage their customers to opt in to overdraft protection to keep the dollars flowing.
Several bills have been introduced in Congress that would go beyond the Fed’s rules on overdraft fees.
Bank of America, by deciding to scrap overdraft charges on debit card purchases instead, is hoping to bolster its reputation with consumers at a time when anger at banks for their role in the financial crisis remains high.
The bank’s overdraft policy will take effect on June 19 for new customers and in early August for existing ones. Overdraft protection will still be available, typically for a fee of $10, to customers who link their checking accounts to savings accounts or credit cards.
Bank officials declined to say how much money the bank earned from overdraft fees, but anecdotal evidence suggests it had been a multibillion-dollar business for the bank.
“Consumers have shown a willingness to incur overdrafts if it’s covering mortgage payments or car payments, but not to cover a hot dog and a soda,” said Greg McBride, senior financial analyst at Bankrate.com and one of a handful of analysts and consumer advocates briefed by Bank of America on its new policy. “They don’t want to incur overdrafts on everyday purchases.”
Martin Eakes, chief executive for the Center for Responsible Lending, called Bank of America’s decision “a very big deal.”
“If Bank of America can forgo the fee income and do the right thing by their customers, this should be seen as a direct challenge to the other big banks to match and do the same,” said Mr. Eakes, who serves on a Bank of America advisory council, an unpaid position.
Of course, because of the new federal rule that requires customers to opt in to overdraft protection, all the big banks are anticipating a sharp drop in revenue once it goes into effect this summer.
But Mr. Eakes said that because of Bank of America’s size, it might have still charged hundreds of millions of dollars in overdraft fees even if most of its 37 million debit customers in the United States dropped out of overdraft protection.
Most major banks continue to charge overdraft fees on debit purchases, though some have modified their policies to appease critics. Citibank, for example, does not allow overdrafts for debit purchases or A.T.M. withdrawals.
It was not known on Tuesday how other banks would react to the change in Bank of America’s overdraft policy.
The bank briefed only a handful of news organizations, with an understanding that its competitors would not be notified until Wednesday.
Last September, Bank of America announced less ambitious changes to its overdraft policy — not charging customers who exceed their balance by $10 or less, for instance — only to have other banks rush out their own overdraft changes that same day.
In its fourth-quarter earnings call in January, Bank of America said those modest changes, which also limited overdrafts to four a day, cost the bank $160 million in just that quarter alone.
Banks are rethinking their policies on consumer products like credit cards, mortgages and debit cards to comply with new laws and regulations and the continued economic malaise. In the past, a relatively small number of customers generated such enormous fees from overdraft charges and penalties on credit cards that they subsidized free checking and generous rewards programs for the majority of customers.
In the case of overdraft, 93 percent of the fees are generated by just 14 percent of the customers who exceed their balances five times or more a year, according to a 2008 study by the Federal Deposit Insurance Corporation. Three-quarters of customers are not charged overdraft fees at all, the study found.
But the collapse in consumer credit, combined with new rules limiting banks’ ability to make money on credit cards and overdraft fees, has prompted banks to experiment with fees that reach a broader set of customers, like annual fees on credit cards and monthly fees on checking accounts.
