The Wall Street Journal is terrific this morning to throw the spotlight on the seedy cottage industry that feeds off the overdraft-fee racket.

Starting on the 15th, banks won’t be able to charge their $35 overdraft fees (which are really 4500 percent short-term loans) to customers who haven’t specifically asked to be charged $30 for overdrawing their accounts.

Who would do such a thing? Well, customers who are misled by banks’ marketing materials warning them about impending doom if they don’t “opt in.” Like this from press favorite (unfortunately) Jamie Dimon and Chase, as reported by the Times in February:

“Your debit card may not work the same way anymore, even if you just made a deposit. Unless we hear from you,” the message, emblazoned in large red type, warns. “If you don’t contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 — even in an emergency,” with “even in an emergency” underlined for emphasis.

But how do these types of letters come about? The WSJ introduces us to some of the swell folks who consult the banks on how to keep screwing their customers in this $40 billion a year racket. Like these guys:

“The clock is ticking … you know that … so how will you get stubborn overdraft users to opt-in? Have you even started?” Acton Marketing LLC asks of potential bank customers on its website. The consulting firm and direct-mail company is pitching banks on a number of overdraft programs, including results of a consumer survey that it sells for $795.

Acton on its website calls overdraft opt-in “the most important topic for financial institutions today” and says its research shows you “How to Market for Optimal Opt-in.” Oh, also “NSF Elasticity,” which sounds pretty nasty, as well as “Transaction Settlement Priorities,” which probably means how to order transactions to encourage more NSF (nonsufficient funds) fees.

The WSJ quotes Acton:

“The biggest threat to the banking business is not having the right or wrong program, but getting the heavy overdraft users to respond,” Mr. (Gary) Gabelhouse says. “Heavy overdraft users will pay almost anything.”

Then there’s this guy:

In March, more than 200 banks paid $199 each to participate in an Internet seminar hosted by David Peterson, a banking-industry consultant who advises banks to consider bundling overdraft protection with other services for a monthly fee. A 40-page presentation that accompanied his lecture includes a profile of a typical overdraft user, described as a person who doesn’t pay attention to account balances, lives paycheck to paycheck, and will engage in a transaction despite knowing it will generate a fee.

The seminar also includes several pages detailing the “five stages of overdraft grief,” which includes “shock and denial,” “pain and guilt,” “anger and bargaining,” “depression” and “acceptance.”

This was entirely foreseeable. I said back in October that the effectiveness of the new rules would depend in part on whether regulators reined in banks’ sure-to-be-misleading marketing.

Of course, how effective this new regulation will be at squelching this disaster for consumers is largely dependent on whether the Fed forces banks not to mislead, I mean “market,” overdraft “protection.” Some required boilerplate explaining first the costs of doing so, including that the average household in America pays $368 in overdraft fees every year, ought to put any subsequent spin in context.

There were no rules on marketing, alas, but some banks have been doing the right thing, of all things. While Chase and others are scrambling to keep the overdraft gravy train running, Bank of America and Citigroup have moved in the right direction, which this story should have noted. Here’s the paper’s Heard on the Street from last week:

BofA has decided it will simply decline such overdraft-prone debit-card transactions, and avoid those notorious $38 lattes. Citigroup’s stance is similar. Wells Fargo is still deciding. Chase is left looking like an outlier. The J.P. Morgan Chase bank has embarked on a blitz to persuade depositors to agree to overdraft charges ahead of a rule change on Aug. 15.

It’s good to see the press continuing to follow this issue. It will continue to be one to look at after August 15. The number of people who end up opting in will be a story, whether it’s high or low or somewhere in between.


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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.