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BofA to scrap overdraft fees on debit purchases

By Hibah Yousuf, staff reporter

NEW YORK (CNNMoney.com) -- Bank of America said Wednesday that it plans to ditch overdraft fees on debit card purchases this summer.

The Federal Reserve recently announced new requirements that are slated to go into effect in July. But the Charlotte, N.C.-based lender's move goes one step further.

The Fed's new rules will prevent banks from automatically enrolling customers in overdraft protection programs, which charge fees when consumers spend more than they have in their accounts. More than 75% of banks automatically sign customers up for overdraft programs, according to a study by the Federal Deposit Insurance Corp.

With the bank's new policy, BofA (BAC, Fortune 500) debit card purchases that would push checking account balances into the red will be declined for new customers beginning in June, and for existing customers starting in early August.

What customers can expect

For customers who attempt to withdraw insufficient funds at one of Bank of America 18,000 ATM machines, BofA will alert them that a $35 overdraft fee will kick in if they continue and ask them to confirm or decline the transaction.

"Our customers have been clear that they want to know if a purchase is going to overdraw their account," said Susan Faulkner, BofA's deposits and card product executive, in a statement.

The bank invested in technology for its ATM's to allow customers to accept or decline overdraft fees right at the machine, explained Faulkner in a conference call. But that infrastructure doesn't exist at point of sale transactions.

Not all overdraft fees are going away. BofA customers will still be charged for bounced checks and for payments that are automatically withdrawn from their accounts without sufficient funds.

Customers will still be able to link their checking accounts to their savings accounts or credit cards to cover transactions that would otherwise be declined. The bank will continue to charge customers a one-time $10 fee when they tap into those accounts to cover transactions.

Overdraft and non-sufficient fund fees have been significant sources of revenue for the banking industry.

The Center for Responsible Lending said overdraft fees on debit card and ATM transaction account for about half of all overdraft fees, which total nearly $24 billion annually.

"Bank of America's decision will allow millions more Americans to use their debit card without fear of being driven into high-cost debt," said the president of the nonprofit advocacy group Mike Calhoun, in a statement. "As the largest debit card issuer, Bank of America stands to lose the most in overdraft fees by stopping this unfair practice."

BofA said the revenue impact of the newest changes will be detailed in the bank's release of its first-quarter results due April 16.

Last October, BofA reformed its overdraft fee policy by not charging overdraft fees if customers' accounts were less than $10 in debt for one day. The bank also limited charging the fee to four items daily instead of ten. The initiatives resulted in a loss of $160 million in overdraft fees for 2009.

Shares of BofA were up nearly 3% in midday trading.

What other banks are doing

JP Morgan Chase (JPM, Fortune 500) reduced the maximum number of daily overdraft fees from six to three in January, and will implement additional reforms at the end of the month and this summer.

The changes, which kick in on March 29, include giving customers a $5 cushion, and moving to a flat fee of $34 instead of a tiered structure that charged up to $35. Customers will also be able to opt out of the overdraft coverage program.

New Chase customers will have to choose whether or not they want to enroll in the program beginning in July, and existing customers who don't specifically sign up for overdraft coverage will no longer be protected in August.

Chase estimates the new plan will cost the bank $500 million annually.

The New York-based bank said it did not have a comment on Bank of America's decision.

Citibank has never charged customers overdraft fees for debit card transactions or at the ATM and said it is "happy to see that some banks are now implementing similar policies."

Citibank said it will continue to cap its $34 fee for bounced checks and overdrafts due to automatic bill payments to four per day.

Wells Fargo (WFC, Fortune 500) said it will be "educating customers soon about the changes that are coming" to its overdraft policy, but did not provide details.  To top of page

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