Bank debit cards may look like credit cards, but they certainly do not act like them when it comes to account overdrafts. This does not suggest that credit cards are better than debit cards, as complaints abound concerning the transparency of fees charged to consumers for credit card transactions as well. Nevertheless, consumers are more familiar with the workings of credit cards, often not realizing that credit and debit overdraft charges work differently. First, many credit card companies will deny a customer charge at the counter if the charge would result in the customer exceeding her credit line. Second, if the bank approves the credit card charge regardless and permits the consumer to exceed her credit line on a credit card, the typical bank imposes a charge averaging well over $27.00. This credit card over-the-limit fee, however, is a monthly charge, rather than a per-transaction charge that is commonplace for debit card transactions that exceed a customer’s bank account limit.
Bank overdraft services operate at high costs to consumers. According to the Consumer Federation of America, the average national overdraft fee at the ten largest banks is $34.65, with $1.75 billion in annual fees paid by consumers to banks for overdrafts resulting from checks, debit card purchases, automated teller machine (ATM) withdrawals, and preauthorized transactions. Very few banks have caps on the amount of overdraft fees that can be charged in a single day on debit transactions, and those that do cap fees have very high daily limits. For example, Bank of America caps its daily overdraft fees at $245. While some large banks also often “batch” reorder daily transactions from highest to lowest, a process that increases the number of overdraft fees banks charge, others such as JP Morgan Chase are trying to get ahead of proposed legislation by abandoning the practice.
Currently, customers often have debit card overdraft protection that they don’t ask for, as banks typically enroll customers in debit card overdraft protection automatically without affirmative customer consent or request. The practice of overdraft protection on debit card transactions persists even though many overdrafts occur on small debit card transactions for which consumers might genuinely prefer the bank deny on the spot, rather than get a $34 overdraft charge. Accounts held by young adults and those with low-income account for the largest portion of overdraft charges, with most overdrafts occurring on point of sale (POS) debit transactions.
The federal government has hardly noticed consumer issues related to newer payment systems such as debit cards until recently. Much of the current world that we know with debit cards is about to change. In early 2009, the Federal Reserve Board, along with the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) (collectively, the Agencies), proposed new rules under the Electronic Funds Transfer Act (EFTA), implemented pursuant to Regulation E, which the Agencies “intended to ensure that consumers have clear and timely information about their account balances, so that they can properly manage their accounts and avoid unexpected overdraft charges” (Proposed Overdraft Rules). Somewhat oddly, the Agencies proposed not just one, but rather, two proposed alternative rules: (i) an opt-out rule whereby a bank could not charge overdrafts unless the bank first gave the consumer notice of the fees and an opportunity to opt-out; and (ii) an opt-in rule whereby the bank could only charge overdraft fees if the consumer opts-in to the bank’s overdraft services.
In a surprising turn of events, the Federal Reserve’s final rules came down mostly on the side of consumers on most of the overdraft issues (Final Rules). The new rules, which banks must implement by July 1, 2010, prohibits banks from charging an overdraft fee on ATM and POS transactions without the customer affirmatively opting-in to overdraft protection. In a defeat for the banking industry, the new rules apply to existing and new accounts and banks must offer the same terms to consumers who do not opt-in to overdraft services. Moreover, banks must offer the same account terms to customers who do not choose overdraft protection for ATM and POS transactions. The Final Rules did not address all issues raised by consumer groups, such as bank holds on certain POS transactions and batch reordering of transactions.
This essay supports the opt-in regulatory mechanism for overdraft fees of the general type adopted by the Federal Reserve, particularly because the multi-tiered approach adopted recognizes that consumers may desire to have overdraft protection on some items, such as paper checks, but may not desire the same protection for ATM and POS transactions. The Final Rules may fall short of achieving transparency in consumer transactions because the Final Rules: (i) do not require disclosure of the annual percentage rate (APR) on overdrafts which might contribute to confusion; (ii) do not eliminate certain banking practices that operate to increase fees on consumer accounts for those who opt-in to overdraft protection, such as bank holds for purchases like gasoline and restaurants and batch reordering of daily transactions; and (iii) do not allow consumers to choose if they want check and ACH overdraft protection. Moreover, the Final Rules do not address the size or fairness of overdraft fees. The failure of the Federal Reserve to timely and adequately address consumer protection deficiencies, such as those related to debit cards, is not a signal that they are unimportant to regulation of the financial industry. Rather, it may be a signal that a closer look at the regulatory structure for consumer transactions is in order.
I. The Problem of Debit Card Transactions
Bank customers using modern payment methods like debit cards face the challenge of deciding whether their account has sufficient funds to make a purchase in a system where overdraft fees are high and bank practices are often unclear. While those whose accounts never run low may have little concern about overdraft fees, the methods banks employ for enrolling consumers and imposing fees can be costly for those on the brink of a negative balance. Without complete information, particularly about the practices of each bank, it is difficult to know if any one consumer can use a debit card at a POS transaction or would be better using cash or another form of payment. Unfortunately, at least until July 1, 2010, consumers with low account balances may be better off not using debit cards at all.
A. Banking Methods of Charging Overdrafts
Deciding whether a consumer should use a debit card or other payment method for a POS transaction depends greatly on the terms of the bank account, what type of overdraft protection the account has for non-sufficient-funds (NSF) transactions, and the bank’s method for charging overdrafts. The banking industry drafts the contract clauses that form the basis for customer account agreements. While freedom of contract (private ordering) dominates consumer depository accounts, some government oversight creates limited consumer protections for those using account services, primarily disclosure-based requirements. Accordingly, an examination of the account programs banks offer to consumers under the terms of their depository accounts is helpful.
Banks commonly offer consumers three types of overdraft programs for their accounts: automated, linked-accounts, and line-of-credit (LOC). Automated overdraft programs use computerized bank procedures to determine if an NSF transaction qualifies for overdraft coverage. If coverage is available, the bank pays the item and charges the consumer a fee. Linked-account programs allow the bank to move money from another account of the consumer, typically a savings account, when the primary account has an NSF transaction. Where there is a linked-account, the bank typically charges a fee for the transfer made to cover the overdraft. A line of credit overdraft program is a contractual agreement between the bank and the customer for the bank to lend a specified amount to cover NSF items, charging a stated rate of interest for the amount advanced.
According to a 2008 Federal Deposit Insurance Corporation (FDIC) study, banks often automatically enroll customers in overdraft protection both for their paper checks and for ATM and POS transactions when they open an account. Customers have to ask for overdraft protection for linked-accounts and must apply and qualify for a LOC program. That is, banking practice for overdrafts utilizes an opt-out system for the more expensive automatic overdraft coverage associated with primary accounts and an opt-in for the less expensive programs of linked-accounts and LOC. These standard practices have historically resulted in higher fees to consumers and placed the onus on the consumer to recognize the difference between the types of overdraft protections.
Among the banking practices most likely to affect consumer accounts are those allowing an overdraft at an ATM or POS debit transactions, but not informing the customer or the seller that the transaction will cause an overdraft of the account. Other banking practices include daily “batching” and vendor debit holds. Daily “batching” is done by a large number of banks by bundling multiple transactions together for processing at some point in the day and then reordering the transactions to increase the number of overdrafts on the account. Vendors such as gasoline stations, hotels, and restaurants place temporary holds on consumer accounts that can linger for days when consumers use their debit card for transactions, even when the actual purchase is smaller, laying the foundation for a potential overdraft if the consumer believes the money is available.
Consumer accounts are dominated by the terms and practices banks offer. While contractual private ordering ordinarily presumes assent to the agreement, consumers may not know which policies and practices affect their account. Because private ordering of banking relationships between consumers and banks does not always result in full knowledge of account terms, consumer protection regulations form an important component when evaluating a consumer’s use of their debit card.
B. Overdraft Fees Under the Final Rules
In recent years, banks have expanded the number of types of transactions and customers covered by overdraft services. Consumers need assistance “in understanding how overdraft services provided by their institutions operate and to ensure that consumers have the opportunity to limit the overdraft costs associated with ATM withdrawals and one-time debit card transactions where such services do not meet their needs.” Under the existing structure, banks can readily enroll customers in overdraft protection and impose fees for NSF transactions. The consumer caught unaware has little choice but to pay the fees. The Final Rules are designed to address at least some of the common consumer complaints about overdrafts.
The Final Rules represent a historic change in regulatory approach to ATM and POS overdraft fees, which banks have operated subject to little federal oversight thus far. Most importantly, under the opt-in mandate of the Final Rules, beginning July 1, 2010, banks can no longer readily enroll customers in overdraft protection and then impose NSF fees when a consumer makes a transaction not knowing about the program. Moreover, banks cannot depend on prior “enrollment” of consumers with existing accounts, but will have to secure consumer approval even for these accounts before imposing overdraft fees on ATM and POS transactions. In the event that a consumer does opt-in and changes his mind, the bank must allow the consumer to opt-out at a later date. Finally, banks may not tie the payment of overdrafts on checks to overdrafts on ATM and POS transactions and must offer consumers who do not want overdraft coverage the same account terms and conditions as those who choose the service.
While the Final Rules adopt a consumer-friendly opt-in approach, issues remain. First, with billions of dollars of revenue on the line, banks may attempt to encourage consumers, subtly or overtly, to choose overdraft protection that covers the ATM and POS transactions. This may inadvertently occur if consumers are not able to fully understand the model disclosure forms or receive disclosure on how banking practices affect the provision of the service. For instance, because the Agencies do not propose to treat overdraft fees as loans subject to TILA, consumers may not realize that a $27 overdraft fee charged on a $20 debit transaction repaid in two weeks represents an APR of 3520%. The APR on other overdrafts could be substantially more, especially if the transaction is smaller and the consumer returns the account to a positive balance the very next day. Second, a short, one page form will not explain to consumers how bank practices, such as batch reordering of transactions or account holds, affect the costs associated with the service if the consumer opts-in. Batch reordering and account holds are not covered by the Final Rules. Third, the Final Rules are disclosure, rather than merit based regulations, so they do not address the size of overdraft fees charged by banks, and do not create any specific rights to challenge the size of the fee.
II. Solving the Problems of Consumer Depository Accounts
The largest problems facing regulation of consumer depository accounts are ones created by the need to keep regulations in pace with innovation. That is, bank innovation results in products on the marketplace that are either completely new or are comprised of such variation that the products might as well be new. Services associated with debit cards are a perfect example because debit cards were not commonplace until the late 1990s. Debit cards attach to regular bank depository accounts, yet are not checks, pure ATM cards, or even credit cards. Due to the changing nature of banking products, any “regulatory measures are temporary expedients, not eternal verities . . .” With respect to debit cards, innovation has progressed unchecked in the wake of consumer excitement for the innovation itself, without creating a parallel regulatory framework. Accordingly, any discussion of the issues of consumer depository accounts should take up an examination of the relationship between consumers and banks and explore possible improvements to existing regulatory structure so it may better adapt to innovations in banking products.
Although Regulation E and Regulation DD provide limited consumer protections, the contract with the banking institution primarily controls account features like debit cards. Contract law is versatile, flexible, and adaptable. Despite the flexibility of contracts that has permitted the innovations regarding POS transactions to become commonplace, the contract paradigm has limitations. While agreement by contract may appropriately govern account aspects, the core of the contract problem with debit cards concerns the basic contract principal of autonomy: whether the consumer actually assents to the bank service. There is doubt whether the bank and consumer relationship satisfies ordinary notions of autonomy in debit card transactions, making arguments in favor of the Final Rules that enhance consumer choice more persuasive.
Autonomy is the basis of mutual assent and traditionally anticipates that parties can determine with some level of certainty the extent of their contractual promises. Mutual assent is at the heart of the overdraft fees controversy. Understandably, there is mutual assent when customers voluntarily open depository accounts and request a debit card as part of the account. However, voluntary agreement for related services like overdraft protection is less certain if many banks automatically enroll customers in the overdraft protection service without consumers’ request, a practice the Final Rules addresses. The disproportionate effect that overdraft fees have on those least able to pay them, young adults, seniors, and those in low-income areas, supports the Federal Reserve’s adoption of an opt-in rule regarding bank overdraft fees.
Full disclosure of the benefits and detriments of the programs prior to an active enrollment decision is the best approach. If under the Final Rules a consumer enrolls in overdraft protection, resolution of assent and fairness hinges upon the disclosure of the terms of the overdraft service and the practices involved in securing assent. For instance, even though Regulation DD affirmatively requires disclosure of fees, the GAO found that consumers have difficulty obtaining account terms and conditions and complete fee information even when requested. Moreover, even if the bank discloses the fees, the government does not regulate the reasonableness of fees or the manner in which they are imposed. The terms of overdraft fees are most likely ones of “adhesion,” in that they are offered or imposed without the ability to negotiate them: “take it or leave it” terms. If the GAO is correct, then banks often fail to disclose the terms at all, even when asked. So, will the Final Rules result in substantial changes in banking practices?
Disclosure is at the cornerstone of most consumer regulations and is the primary prong of financial regulation. The Final Rules address disclosure issues primarily through the model opt-in form (the form) that accompanies the rules. Importantly, the form: (i) requires that banks affirmatively give customers knowledge of enrollment in overdraft services; (ii) specifies the fee amounts that a bank charges per overdraft transaction, any daily fee charged for the account being overdrawn, and any daily limits on overdraft fees; and (iii) contains information about other, less costly banking services and where the consumer can obtain more information. These changes are significant because under current practice banks enroll many consumers without their knowledge or consent and without such disclosures. Upfront disclosure is a key feature of the Final Rules, especially since consumers sometimes have difficulty obtaining fee terms at many banks despite Regulation DD requirements of fee disclosure. Of course, no form is perfect and there remains the potential for consumer confusion.
Curbing bank practices that disadvantage consumers by increasing the amount of overdraft fees incurred is the second prong in the solution to the problems with overdraft protection services banks currently offer. On this point, the Final Rules fall short. Although the Proposed Overdraft Rules addressed the issue of debit card holds by reducing many of the holds from days to just hours, the Final Rules contain no restrictions on holds, leaving wide discretion for the length and size of holds. It is doubtful that a consumer who goes out to gas up the car and buy groceries will know that in order to avoid an overdraft fee caused by a two hour gas pump hold on their card, he or she may want to buy groceries before gas when account balances are low. The Final Rules also do not take up other banking practices that increase the amount of overdraft fees, such as batch reordering of transactions from largest to smallest.
The final prong of any solution regarding overdraft fees must address the size and number of fees imposed for consumers who opt-in the service. While banks typically impose credit card over-the-limit fees on a monthly basis, banks charge overdraft fees on a per-transaction basis. Some consumers may continue to believe that credit and debit cards work the same in this respect. Consumers also tend to believe that government regulation is merit oriented, rather than disclosure based. While some in Congress have urged restrictions on overdraft fees to a “proportional” amount, the Final Rules do not take up fee size. To the extent that some banks charge overdraft fees on NSFs of less than $5, the size of the fee imposed is clearly material to consumers. Some banks have altered current practices to address this issue.
While the Final Rules represent an improvement over the status quo in terms of informing consumers about enrollment in overdraft services, they do not represent a complete solution to open issues of debit and ATM overdrafts. From the industry perspective, there are genuine operational issues at some banks that will require retooling of existing systems. Much of this must take place by July 1, 2010. Despite the successes in the Final Rules, consumers should not believe that they represent a panacea for overdrafts. If they do, disappointment will follow. This type of regulation is long overdue, probably owing to the more recent development of the product and regulatory system’s inability to respond effectively and promptly to developing issues in newer products. At its simplest, a solution to the problems of consumer choice and disclosure in debit card overdrafts favors a default rule system that gives the consumers an arrangement with the lowest cost. Despite the criticisms herein, the Final Rules go a long way toward that goal.
“Like all other questions, the question of how to promote a flourishing society . . . [should] be answered as much by experience [as by] theory.” What does experience show when consumer complaints abound regarding overdraft fees charged for ATM and debit transactions? Full disclosure enhances consumer choice, a point on which the Final Rules makes progress. The heavy cost of overdraft services on debit and ATM transactions in comparison to the cost of the items that cause the account to be overdrawn dictate that regulatory leadership is necessary. The Federal Reserve should not, however, avoid the shortcomings of banking practices that increase overdraft fees in ways that consumers would not anticipate and that are harsh.
Though the current economic climate sharpened the need for reforming financial oversight, the ultimate course of conduct that will provide “robust consumer protections” in the long term remains unclear. The proper blend of market and government regulation is still the subject of active debate. As we face an aged regulatory structure that has become less responsive to the current marketplace, embracing a long-term strategy of some type is a necessity. Yet, “Some truths are so basic that, like the air around us, they are easily overlooked.”  Market regulation dependent upon the transparency of transactions has little room for practices that undermine the same transparency and consumer choice. Even when the Final Rules come into force, the failure to achieve greater transparency suggests the best practice for most consumers will be not to choose debit and ATM overdraft services. Until then? Use your debit cards with care.
Jennifer S. Martin is a Visiting Associate Professor of Law at the University of Oregon School of Law. Professor Martin can be reached at email@example.com. J.D. Vanderbilt University School of Law; B.S. University of Nevada, Las Vegas. Portions of this article are based on an article that first appeared in the Memphis Law Review in 2009. See generally Jennifer S. Martin, How Your $4 Cup of Coffee Can Cost You $39 or More if You Use Your Debit Card! Federal Level Consumer Protection and Modern Payments Transactions, 39 Memphis L. Rev. 805 (2009).
 See Testimony of Adam J. Levitin Associate Professor of Law Georgetown University Law Center before the Committee on Senate Banking, Housing and Urban Affairs (Feb. 12, 2009) (arguing that the lack of transparency costs American consumers $12 billion in unnecessary interest and fees in 2007).
 See FDIC Study of Bank Overdraft Programs at iii (2008) available at http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_v508.pdf [hereinafter FDIC Study] (reporting a $27 average fee in 2006); Jon Rao, “Credit Cards and Bankruptcy,” Senate Judiciary Committee Testimony (Dec. 4, 2008) (national average over $30); Kathy Chu and Byron Acohido, “Why Banks Are Boosting Credit Card Interest Rates and Fees,” USA Today (Nov. 9, 2008), available at http://www.usatoday.com/money/industries/banking/2008-11-09-bank-credit-card-interest-rates_N.htm (national average of $26.88); Index Credit Cards Survey, available at http://www.indexcreditcards.com/creditcardlatefees/ (December 2, 2008) (reporting the national average over-the-limit fee at $36.53).
 See Consumer Federation of America Press Release (August 6, 2008) available at http://www.consumerfed.org/pdfs/Overdraft_Comments_press_release_8-6-08.pdf. See also FDIC Study, supra note 2 ($1.97 billion in fees for 2006, representing 74% of all service charges on deposit accounts).
 See also Kelli Grant, “5 Sneaky Overdraft Traps,” SmartMoney (Aug. 18, 2008) available at http://www.smartmoney.com/spending/deals/5-sneaky-overdraft-traps-23679/; FDIC Study, supra note 2, at 11.
 FDIC Study, supra note 2, at v. For accounts held by young persons (ages 18 to 25), 46.4% had NSF activity. Id. For accounts held by low-income customers, 38% had at least one NSF transaction. Id.
 Statement by Chairman Ben S. Bernanke, Federal Reserve, Dec. 18, 2009, available at http://www.federalreserve.gov/newsevents/press/bcreg/bernanke20081218a.htm.
 See Federal Reserve Press Release (Nov. 12, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/20091112a.htm.
 See, e.g., Electronic Funds Transfer Act, 12 C.F.R. §205.1 (2009) (“primary objective . . . is the protection of individual consumers engaging in electronic funds transfers”); Regulation DD, 12 C.F.R. 230 (2009) (“primary purpose . . . is to enable consumers to make informed decisions about accounts at depository institutions”).
 Electronic Funds Transfer Act, supra note 8, at §215.
 12 C.F.R. § 205.17(b).
 Fed. Power Comm’n v. E. Ohio Gas Co., 338 U.S. 464, 489 (1950) (Jackson, J., dissenting). For a good discussion of the problems of regulation in another traditional regulated industry, telecommunications, see Jim Chen, The Death of the Regulatory Compact: Adjusting Prices and Expectations in the Law of Regulated Industries, 67 Ohio St. L.J. 1265 (2006).
 See, e.g., Michael Trebilcock, The Limits of Freedom of Contract, 22-57 (1993) (“a private property-private exchange system depends, for its stability, on the system’s being non-universal”); Alan Schwartz and Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 Yale L.J. 541 (2003) (arguing that the contract should focus on wealth maximization and nothing else).
 See Government Accountability Office, “Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts,” available at http://www.gao.gov/new.items/d08281.pdf (less than 40% of banks provided account terms and conditions when the GAO personnel visited bank branches and less than 25% provided comprehensive fee information).
 Daniel A. Farber, Legal Pragmatism and the Constitution, 72 Minn. L. Rev. 1331, 1347 (1988).
 New York v. United States, 505 U.S. 144, 187 (1992).