Reg E on Horizon for Retailers, Bankers

The next big challenge in retail banking will be the forthcoming changes to consumer overdraft protection. Amendments to Regulation E imposed by the Board of Governors of the Federal Reserve System in late 2009 are set to go into effect for new banking customers on July 1 and existing customers on August 15.

Reg E, as it’s known, affects electronic funds transfer – specifically debit card and ATM transactions.

Local bankers are scrambling to get the word out so consumers can make educated decisions about opting in (which would largely keep things they way they are) and opting out (which would prevent a transaction from going through if there are insufficient funds).

Some observers believe this is an attempt at protecting consumers from themselves and said it ranks among the most notable banking overhauls in decades, though there are varying opinions about its benefits for banks, retailers and the end user.

What concerns some are the unintended consequences that may follow the change. Banks stand to lose fee income and retailers could – theoretically – lose sales because more transactions won’t go through.

Tim Yeager, a finance professor at the University of Arkansas, put it like this: “Suppose you drive up to an ATM and want to withdraw money from your debit card. Before, if you had insufficient funds, the bank didn’t have to tell you that. Suppose you have $20 in your account and you withdrew $50. The bank would allow that transaction to go through, but they would also charge you an overdraft fee.

“Suppose you have a new baby who needs milk, suppose your debit card is out. Do you have a credit card? Or are you just stuck?

There is no right or wrong answer. “It really depends on the individual consumer.”

Overdraft fees have a fairly wide range. The Bank of Fayetteville has an $18 across-the-board overdraft fee, while Arvest Bank charges even less. The national average is $27.

“We want to give customers the choice,” said Lorrie Madden, executive vice president and sales manager at Arvest Bank, Benton County. “We want them to be informed about what the changes are. Once they are, we will allow them the opportunity to make a choice about whether they want to opt in or whether they no longer want to do it that way.”

 

Good Service

Banks across Northwest Arkansas are using numerous methods – mail, phone, Internet, and face-to-face interaction – to get the word out about the upcoming changes.

Jason Kincy, a spokesman for Arvest Bank, said the area’s largest lending institution does not want customers opting into a service they lack confidence in. “This is a service designed to bridge a gap in case the customer has made a bookkeeping error or the customer needs to make a purchase when funds are not available,” he said.

Regarding those who would not normally overdraft, “It’s all about customer choice,” Kincy said. “There is no fee for opting into the service. Someone who does not normally overdraft may be glad they’re covered to avoid an unexpected inconvenience. Overall, we think it’s a good service for those who understand it and need it.”

About 85 percent of Arvest customer accounts do not incur overdraft fees. Kincy said the upcoming impact on the banking industry is difficult to gauge since so much depends on consumer response.

The overall impact on Arvest, he said, “could be less than other banks simply because we have the lowest overdraft fee in the region. We feel like we’ve been very upfront and fair about our program.”        

“Signature Bank is smaller,” said Kai Dare, vice president of marketing and sales. “We have probably 2,500 customers that are going to be affected by this new regulation. Our chief concern is that customers aren’t keeping up with this change, and they’ll go to Walmart for a bag of groceries and get turned down for insufficient funds. We’re concerned people won’t read the information being sent to them.”

Dare said customer impact is Signature’s overriding concern during the transition. But overdraft fees do affect bottom lines. About 2.9 percent of Signature’s total gross income for 2009 came from insufficient funds fees, she said.

“We are a newer bank with a little higher-end customer base, so other banks’ incomes are probably a much higher percentage,” Dare wrote in an e-mail.

Susan Blair, senior vice president for retail at Bank of the Ozarks, said the BOZ team has already begun contacting customers who most frequently use overdraft coverage, though she said that’s typically a very small percentage of customers.

“Our position is we want to comply with the regulation and want our customers to have the option of how they want to use their check card,” Blair said. “By far, the majority of our customers that we’ve reached out to that are frequent users want to opt in.”

Banking consultant Debi Barnes, a principal at DD&F Consulting Group in Little Rock, believes educating the public is key to a smooth transition, and that most bankers are already working to get the word out.

In spite of negative publicity regarding some of the nation’s largest banks, Barnes said reality is different closer to home. “There are a lot of people in Arkansas and other states that deal with small community banks. They do a very good job for their customers.”

“I think banks in general are under a lot of scrutiny right now. I think people are distrustful of banks in general, but small banks have a strong alliance with their communities.”

Barnes described banks as good corporate citizens who already exist in a regulated world. Nationwide, she notes that 75 percent of account holders never overdraft; meanwhile, a mere 5 percent of customers overdraft 20 or more times a month. Some do so out of necessity, others because they don’t pay attention, she said.

“Unfortunately, many of the regulations we have are because of a few abuses,” Barnes said. “In some cases, regulations go too far because of a small number of institutions who make it necessary for that to happen.”

 

Retail

Retailers don’t seem too concerned at the prospect of losing revenue due to Reg E. 

J. Craig Shearman, a spokesman with the National Retail Federation, said the organization has not taken a position on Reg E. The NRF is more concerned with interchange fees, the fees retailers pay for each e-transaction, he said.

Likewise, a spokeswoman for Wal-Mart Stores Inc. of Bentonville, said the world’s largest retailer has no opinion. Still others struck a confident note about the ways their bottom line might be affected.

“I doubt it would have a big affect on us,” said Mike Thurow, vice president of store systems at Harps Food Stores. “If someone had their card declined they would just use another card. People are pretty adaptable.”

Thurow, who notes that debit is the largest form of electronic transactions at Harps, believes the change is probably a plus. 

“I think it’s probably a good thing for consumers. You wouldn’t want those overdraft charges if you can avoid them.”

“I doubt it would have a big affect on us,” said Mike Thurow, vice president of store systems at Harps Food Stores. “If someone had their card declined they would just use another card. People are pretty adaptable.”

Thurow, who notes that debit is the largest form of electronic transactions at Harps, believes the change is probably a plus. 

“I think it’s probably a good thing for consumers. You wouldn’t want those overdraft charges if you can avoid them.”

 

Consumers

Bruce Castleberry, community outreach coordinator at Credit Counseling of Arkansas, believes the new rules are a great idea.

“The biggest thing we find is that some people don’t have a lot of financial savvy,” he said. “People without a lot of experience don’t realize how quickly they can get in trouble. A lot of people don’t have the ability to pay. What are they going to do? You find people going to a check-cashing bank or even a pawnshop. A lot of times when you’re overdrafting you don’t even know it at the time you’re doing it.”

Castleberry believes beating overdraft fees comes from consistently staying on top of one’s debt situation. Additionally, most people learn their financial habits at home. If parents are good about money management, it’s more likely their children will be too.

“The rest of us are going to learn by trial and error,” Castleberry said. “And trial and error can be pretty costly.”

Jean Ann Fox, director of financial services for the Consumer Federation of America, thinks it’s easy for Americans to get trapped in a never-ending debt cycle – and points to an impressive collection of overdraft fees as proof. (Americans pay $23.7 billion annually in overdraft fees according to the Center for Responsible Lending.)

“We think all bank customers deserve the same protections,” Fox said. “It shouldn’t matter how big the bank is you do business with. You should be able to control your bank account.”

Fox said some banks are guilty of luring their most vulnerable customers into opting in, and that the new rules, while a good start, do not offer enough protections. Fox said consumers everywhere deserve the right to affirmatively sign up for all forms of overdrafts, among other things. 

“Banks should deny debit card purchases when you don’t have it,” she said. “Debit cards shouldn’t be a credit instrument. It’s not appropriate to let customers rack up debt. We think consumers will be better off when the Fed rules take effect. Banks have a different opinion because, of course, they are happy to have all that fee revenue.”

Between the recession and the Wall Street meltdown, Castleberry said it’s easy to give bankers a hard time. Yet he believes there’s still such a thing as individual accountability.

“There are predatory lenders out there,” he said. “But we try and educate consumers about the risks and the importance of personal responsibility and protecting your money. Don’t give somebody the opportunity to take advantage of you.”