Banks Slowly Reconsider Overdraft Fees, Under Public Pressure

The banking industry seems to have exaggerated on overdraft fees.

After decades of accumulating billions of dollars of mostly cash-strapped poor Americans in their accounts, the biggest banks – under pressure from lawmakers and regulators – are slowly decreasing their reliance on it. largely unpopular practice.

A number of major banks have taken steps this year to reduce the amount they withdraw from overdraft fees, which they charge when customers make payments or withdrawals that exceed their account balance. Capital One, the country’s sixth-largest bank, announced last week that it would end all overdraft fees next year. Other banks have made it more difficult for customers to trigger overdraft fees.

Still, the financial services industry is unlikely to get rid of such a cash cow anytime soon.

“For many large banks, overdraft fees are still the stable, reliable, predictable and easy income shareholders love,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in remarks last week where he asked. to the office to take a closer look at the bank. discovery practices.

The overdraft stems from the fact that banks provide a service – for a fee – to customers who may not have balanced their checkbook properly and want a bank to honor a purchase. But the widespread use of debit cards has turned this courtesy into a common source of income. Some banks have taken advantage of this, for example, by reorganizing customer transactions, deducting large transactions first so that small payments then trigger multiple overdraft fees. If a customer ran out of funds in their account, a $ 5 coffee purchase could end up costing them $ 35, due to overdraft fees.

Overdraft fees, which began in the 1990s, have become lucrative for the industry, but at the same time have made banks a target for consumer advocates and their allies in Congress. After the financial crisis, Democrats instructed the CFPB and other regulators to limit income from overdraft fees.

According to the CFPB, frequent overdrafts tend to tilt in favor of those who live paycheck to paycheck, and are also disproportionately black and Latino. One of the main reasons blacks and Latin Americans give for choosing not to have a bank account, or to be “unbanked,” is that they try to avoid bank charges.

Industry revenue from overdraft fees remained fairly stable until last year, when banks waived the fee in any case during the first few months of the pandemic, when millions of Americans took lost their jobs and businesses were closed. Overdraft fee income fell to $ 8.82 billion last year from $ 11.68 billion in 2019, according to data collected by S&P Global Market Intelligence.

In the first nine months of this year, overdraft revenue totaled $ 6.13 billion, according to data from S&P Global.

Despite outcry from some Democrats, regulators in Washington aren’t necessarily looking to remove overdraft fees. In a speech last week, the acting chief of the Office of the Comptroller of the Currency, Michael Hsu, said that “low cost or no charge overdrafts” would allow those who live from paycheck to paycheck. other “to pay their bills on time, to avoid high expenses. cost alternatives and improve their credit profile.

Hsu said recent changes to overdraft policies by some banks could serve as a model for the industry.

Regional banking giant PNC has launched new account features like low balance alerts and a grace period that will help consumers avoid overdraft fees. The PNC also plans to limit overdrafts to one per day.

Pennsylvania-based PNC told investors that its overdraft fee income is expected to decline from $ 125 million to $ 150 million per year as the bank rolls out the “Low Cash Mode” product. PNC generated nearly $ 273 million in overdraft fee income last year, according to S&P Global.

JPMorgan Chase, the country’s largest bank by assets, earlier this year waived overdraft fees for clients with accounts overdrawn by $ 50 or less at the end of the business day. Last week, the bank said it would give customers 24 hours to reduce their accounts to $ 50 or less overdrawn in order to avoid fees.

From 2015 to 2020, JPMorgan annually led the industry in overdraft fees collected. In the first nine months of 2021, Wells Fargo collected the highest amount of overdraft fees, just over $ 1 billion, according to S&P Global.

In June, Ally Financial, the 18th largest bank by assets, said it would remove overdraft fees on all of its products. Ally specifically cited the racial inequity seen with overdrafts as a reason to stop charging fees.

“It was the right thing to do,” said Diane Morais, president of personal and commercial banking products at Ally Bank.

Ally earned relatively little overdraft fees. The bank told investors that removing the overdraft fee would not have a significant impact on its profits.

“This is probably a revenue item that deteriorates over the long term and banks will need to find other areas of commission income to offset this downward trend,” said Kyle Sanders, analyst at Edward Jones who covers Wells Fargo, PNC and several other major retail banks.

One way that banks are likely to compensate for a drop in overdraft fee income could be a return to monthly account fees, which would be a change in the industry after decades of advertising “free verification” to their customers. Wells Fargo and Bank of America charge $ 5 per month for using accounts that do not allow customers to overdraft.


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