Proposed Debit Card Regulations Could Cause 1,000 Banks and 2,000 Credit Unions to Fail

New regulations that offer consumers additional rights and protections when using credit card have become law and are going into effect and now Congress will very likely focus on adding additional protections for users of checking accounts and debit cards.

In a recent press release, Rep. Carolyn Maloney (D-NY) described the legislation that she is drafting:

Now that credit card legislation has become law, Congress will likely focus on consumer protection related to checking accounts and debit cards. This NY Times article, Overspending on Debit Cards Is a Boon for Banks, looks at the overdraft issue and the bill introduced by Representative Carolyn Maloney, Democrat of New York. Her press release described the bill:

[The legislation] would require notice to customers at the ATM or point-of-sale terminal when a purchase is about to trigger an overdraft – and would give consumers at the transaction point a choice of whether to accept or reject the overdraft service and the associated fee and requires disclosure of the terms and charges associated with an overdraft program and an opportunity for account holders to opt in, rather than being automatically enrolled.

The legislation may have a major impact on banks as well as customers that never incur overdraft fees. According to Michael Moebs, an economic advisor for many banks and credit unions stated that Rep. Maloney’s legislation would effectively kill overdraft services, which could cause up to 1,000 banks and 2,000 credit unions to fold within the next two years. The reason for these potential failures is that 45% of banks collect more in overdraft fees than they make in profits. In a recent New York Times article, Moebs stated, “Will they be able to replace it with another fee?” Mr. Moebs said. “Not immediately and not soon enough.”

According to an FDIC report, NSF-related fees accounted for 24.8% of the total non-interest income earned in 2006.

Unsurprisingly, the banking industry vehemently opposes the legislation. Some banks have suggested they may need to add a $10 to $20 monthly fee on every “free” checking account to make up the revenue. Rewards from debit cards and rewards checking accounts would almost certainly be slashed as well.