Chapel Hill, NC: September 24, 2009: Bank of America, Chase, Wells Fargo and PNC have all announced changes to their seemingly harsh overdraft fees and policies. The changes include introduction of grace periods, lower fees, and requirements to opt into the program.

In 2007, banks earned about $28 billion from overdraft fees, according to the consulting firm Oliver Wyman. Compare those fees to $14 billion consumers spent on books that year, or the $29 billion consumers spent on major appliances.

Just 5% of customers accounted for 68% of revenue from overdraft fees, while 74% of customers did not incur any overdraft fee.

By lowering fees and easing overdraft policy, banks will certainly gain good will and new marketing angles in which they may promote products and services. Yet, it seems unlikely that banks will forgo any significant amount of income to gain some marketing advantage. Lost profits will need to be regained most likely through different fee sources or lowered operating expenses.

Consumers already rely heavily upon online banking and debit cards, so requiring use of those services will likely not be the key focus of any repackaging efforts. The continued consolidation of the industry and the closing of branches are trends already established, and are therefore likely not a key initiative related to the change in overdraft fee policy.

Likely strategic consequences from these overdraft changes will be to modify no-frills free checking to a bundled package with a monthly service fee option.

Product line changes to recover fees seem highly likely given that the overdraft policy changes will most likely include the requirement to opt into the program. Most overdraft programs now involve automatic enrollment. Given the choice to opt into an overdraft program, most consumers will likely decline the offer.

The overdraft policy revisions may likely come from an effort to avoid government mandated revisions similar to the sweeping reforms enacted for credit cards earlier this year. The new credit card law requires banks to give customers the choice to opt into over-the-limit programs. Last week, Sen. Christopher Dodd, D-Conn., said he plans to introduce legislation that would require customers to sign up for overdraft protection.

Anticipated Overdraft program changes:

Bank of America

Starting in October 19:

• No fee when an account is overdrawn by less than $10 a day. *
• The maximum number of overdraft fees per day will be four, down from 10.
• The initial overdraft fee remains $35, raised up from $25 earlier this year.

Starting in June:

• New customers will need to opt into the overdraft program.
• An annual limit for the number of times customers can overdraw accounts with debit cards.
• Customers who reach the annual limit will have overdraft ability restricted.

JP Morgan Chase

Starting early next year:

• No fee when accounts are overdrawn by $5 or less. *
• The maximum number of overdraft fees per day will be three, down from six.
• New and existing customers will need to opt into the overdraft program if they want it.
• The initial overdraft fee remains $25.

PNC Financial

Starting in October:

• The fee for the first overdraft in a 12-month period will be $25, down from $31.
• The $15 setup fee for overdraft program is being eliminated.

Wells Fargo & Co.

Start date to be determined:

• No fee when an account is overdrawn by $5 or less. The number of days the account may be overdrawn has not been set.
• The maximum number of overdraft fees per day will be four, down from 10.
• Customers will also be able to opt out of overdraft coverage.
• The bank could not immediately supply the initial overdraft fee.