The upside of not gouging customers

Bank of America says it has lost $364 million in revenue because it quit charging surprise $35 overdraft fees on point-of-sale transactions - the trigger for the now-infamous "$40 hoagie" or "$37 cup of coffee."  But its new approach also has an upside: a 27 percent drop in customers who leave the bank, apparently because many were fleeing in anger.

According to my Philadelphia Inquirer colleague Harold Brubaker, who wrote about the cost of the Federal Reserve overdraft regulations on Friday, Bank of America is hardly alone.  Wells Fargo came up $380 million short, and PNC Bank lost out on $44 million.

Brubaker wrote that the large banks are, as expected, trying to impose new fees to make up for some of the shortfall - click here to read his article.  Bank of America, for example, has introduced a new checking account that has no monthly fee for online banking and electronic statements but charges $8.95 a month for using teller services.

But Brubaker didn't have space to discuss all the ramifications of Bank of America's new approach, which goes beyond what the new Federal Reserve rules require.  Unlike many banks, Bank of America decided not to try to get customers to opt into its "routine overdraft protection," where point-of-sale transactions are routinely approved but generate large costs to consumers. (Click here to see how the system worked for Wells Fargo.)

Bank of America, for instance, now presents a new option to low-balance ATM users who previously would have been quietly allowed to withdraw more than they had in their accounts, then charged a $35 fee for the privilege. Now it offers them a straightforward and transparent choice: In essence, the bank machine offers them an on-the-spot overdraft loan.

Even more interesting was this nugget from Bank of America's earnings presentation: The same anger that was generating calls to consumer columnists like me, and columns such as this one about a consumer who faced $630 in fees even though he'd supposedly opted out of another bank's "routine overdraft overprotection," was also losing Bank of America a whole lot of customers.

Bank of America says its new, more customer-friendly approach has turned the tide. "Customer attrition," or churn, was down 27 percent in the most recent quarter, compared with a year earlier when the new overdraft rules were still pending as part of the Fed's revised "Regulation E."

Here's how the bank tallied the impact of its new policy in a Power Point presentation for investors. First, this was how things looked a little more than a year ago:

Background for Decision (Summer of 2009)

• Small percentage (10%) of customers paid large amount of the charges (70%) averaging $1,000 fees per year
• Customer complaints were nearing all-time highs –significant majority of deposit complaints were overdraft issues
• Account closures by customers were at historic highs and increasing
• Regulation E was coming

Here's how the bank sees it now:

Current State

• Account attrition 27% better than in 3Q09
• Customer satisfaction scores improved
• Customer complaints are down 51% - particularly escalated
• Customers have enhanced accounts with overdraft protection
• Associate satisfaction has improved

Is there some spin in this - some attempt to make lemonade out of lemons? Undoubtedly. That's what companies do when they talk to analysts and investors. But BoA says that 40 percent of account-holders still have some form of overdraft protection, which allows them to knowingly dip into a line of credit and pay interest and fees. It's also pressing forward with customer education and promotion of high-tech alerts, such as text messages that warn when a balance is low - an increasingly common account feature at many banks.

What it isn't doing anymore is making easy money off the young, the ill informed, and the financially stressed, who were likely the predominate victims of its old approach. It will make some of that back by charging more for services to lower-balance customers, but only what the market will bear. Smaller banks and credit unions may be better options for some of those customers, anyway.

So far, judging by the reduction in churn, Bank of America's decision to forgo high-fee overdrafts may have an unexpected payoff.