On Thursday, Boston Globe reported that Bank of America Corporation (BAC) has decided to scrap its planned overdraft protection fees, slated for introduction early next year. Announced in May, the plan has been called off for reasons undisclosed.
This is the second time that BofA has canceled its plan to charge fees for the overdraft facilities. Last week, after receiving bitter responses from consumers and lawmakers, the company discarded its plan to charge a $5 monthly fee on debit card purchases. BofA was under pressure to drop debit card fee as some of its peers like JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) had already taken similar actions.
Currently, BofA is rejecting a debit card transaction if there is insufficient fund in a customer's account. Initially the company had intentions to provide a service to inform the customers regarding the deficiency of funds through a text message. It also considered offering customers with an option to go ahead with the transaction and pay $35 as an overdraft fee.
Debit card fees became an industry trend last month after banks started suffering from revenue losses due to the imposition of the debit interchange fee (proposed by the Durbin Amendment), effective from October 1. The new federal rule restricted banks’ ability to charge merchants, whenever a card is swiped.
The Fed’s proposal to slash interchange fees was a desperate move to stop large banks from earning super-normal profits. This attempt was backed by the noble intention of infusing this money into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.
With BofA and its peers gearing up to charge their debit card users on various grounds, so as to recoup some of their revenue losses, the cycle of cost shift would have eventually fallen on consumers’ shoulders. Hence, the main purpose of slashing interchange fees would have been defeated.
We believe that though BofA’s move to abandon its plan to charge overdraft protection fees would pressure its top line, this would go a long way in restoring customers’ and investors’ confidence in the company.
Currently, BofA retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
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WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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