Partners, Volume 13, Number 2, 2003
Partners, Volume 13, Number 2, 2003
|Bounce Protection: Awareness Is the Key|
Overdraft protection for checking accounts has long been available. So how is bounce protection different and why is it a new issue for consumers?
In recent years, many financial institutions have introduced bounce protection as a unique overdraft product for their deposit customers. Unlike traditional overdraft products, bounce protection is usually informal in nature and can be initiated by the bank without a pre-arranged, written agreement between the customer and financial institution. The potential impact of this product on low- and moderate- income depositors has spurred debate between the financial industry and consumer advocacy groups.How bounce protection works
Deposit accounts (noninterest checking and NOW accounts) are assigned a bounce protection limit, typically from $100 to $1,000, depending on the type of account. The bounce protection amount is added to the account holder’s actual balance, and customers are permitted to write checks on the total.
Unlike traditional overdraft protection, this product includes the bounce protection amount in the customer’s available balance. However, when a customer writes a check that exceeds the amount of the actual funds in the account, he or she is charged the normal NSF (“Not Sufficient Funds”) fee, despite the indication of an adequate “available balance.”
NSF fees typically range from $15 to $35 for each check that dips into the bounce protection amount. The NSF fee is subtracted from the customer’s available funds, and the customer receives notification that an overdraft item has been paid, along with a notice requesting a deposit to replenish the bounce protection portion of their account.
Deposit customers can also activate bounce protection by using ATMs or debit cards. In some cases ATM terminals show only the customer’s available balance, which includes the bounce protection amount and therefore overstates the customer’s actual balance. Thus customers who use ATMs and debit cards must be especially vigilant about maintaining accurate account records to avoid overdraft charges.Bounce protection disclosure
Bounce protection disclosure to retail depositors usually states that approval of overdraft items is at the discretion of the bank, even if overdrafts have been paid for the depositor in the past. Because the financial institution offering the program is not legally obligated to pay the overdraft, bounce protection programs typically have not been subject to Regulation Z Truth in Lending Act disclosures.
Account holders can often opt out of the bounce protection feature by contacting staff at the financial institution. Customers who already have an overdraft protection line of credit must sometimes choose between the bounce protection feature and the overdraft protection line of credit.Industry and advocacy groups square off
To what extent is bounce protection a benefit to customers? The banking industry and consumer advocacy groups hold diametrically opposing views.
The banking industry claims that bounce protection a) eliminates the aggravation and embarrassment of a returned check by a retailer; b) saves the cost of additional charges from some retailers for returned checks; and c) adds convenience and flexibility in managing funds.
Most consumer advocacy groups argue that financial institutions offer this product to raise profits. Some vendors who market bounce protection to banks claim it can increase a bank’s fee income by as much as 300 percent.
Advocacy groups further contend that banks’ marketing practices essentially target and exploit vulnerable customers who are less informed and lack financial sophistication. Pointing out that depositors are in essence encouraged to overdraw their accounts, they note that bounce protection is no better than a payday loan since accounts have to be brought to a positive actual balance every 30 to 45 days.
Watchdogs stress that, when calculated on an annualized basis, NSF fees can translate into annual percentage rates of between 100 to 1,000 percent, depending on the protection limit.Federal Reserve System response
The debate on this issue prompted the Federal Reserve Board to solicit information and comments from the public regarding bounce protection services in its 2002 proposal to revise the official staff commentary to Regulation Z, which implements the Truth in Lending Act. About 300 comments came from financial institutions, vendors and consumer advocates. The Board continues to gather information with the goal of better understanding the nuances of programs offered by different institutions before determining what action, if any, needs to be taken.
Whether or not additional regulation is created to address this issue, the best defense for consumers is stronger awareness about how to handle a checking account or NOW account properly. As Fed Chairman Alan Greenspan recently noted, financial education can play a critical role in improving the financial status of families by equipping consumers with the knowledge required to choose from the myriad of financial products and providers. Today’s consumers must be able to differentiate between a wide range of products, services and providers to manage their personal finances successfully.
By Gary Clayton, senior consumer affairs examiner in the Atlanta Fed’s Department of Supervision and Regulation.