Technology and politics are leading banks to rethink overdraft fees


PNC’s overdraft avoidance feature, called Low Cash Mode, debuted in April. (Photo courtesy of PNC)

The amount of money banks make from overdraft fees has fallen dramatically since 2019 – and that income may never return to pre-pandemic levels, observers say.

At the start of the pandemic, widespread stay-at-home orders meant consumers weren’t spending as much money. Then, numerous rounds of federal stimulus payments gave millions of Americans an extra cash cushion.

These two factors meant that bank customers were less likely to overdraw their checking accounts and incur overdraft fees.

Even as the economy rebounds, a combination of factors – technological advancements, competitive pressures, and political control, among others – are pushing banks away from overdraft fees as a source of income. Instead, banks are deploying a host of tools and products designed to help their customers avoid such fees.

Pittsburgh-based PNC Bank and Cincinnati-based Fifth Third Bank are among those in this market that have deployed new overdraft avoidance tools in recent months. Others, including the Birmingham, Alabama-based Regions Bank, have announced plans to completely eliminate overdraft fees on certain accounts.

“Everyone is going down this path,” said Andy Baker, PNC Bank’s retail banking market manager for central Indiana, Missouri and Illinois. Baker lives in St. Louis but spends about half of his time in Indianapolis.

Mike ash

Andy Boulanger

In the 1980s, Baker said, it was common for consultants to advise banks on how to maximize their income through overdraft fees. Now the momentum is going in the opposite direction, maybe for good, he said.

Mike Ash, Indianapolis-based market president at Fifth Third Bank, also predicted the trend will continue to accelerate. “In any industry, once a trend starts, if you don’t, you’re going to be left behind.”

According to S&P Global Market Intelligence, before the pandemic hit, U.S. banks were reliably earning more than $ 2.5 billion per quarter from overdraft fees, peaking at $ 3.1 billion in the third quarter revenue plunged to $ 1.4 billion in the second quarter of 2020, reaching $ 2.3 billion in the fourth quarter.

In the second quarter of this year, overdraft revenue totaled $ 2 billion.

Nathan Stovall

Granted, overdraft fees aren’t where banks make the most money. As a percentage of total income, overdraft fee income is in the “low numbers” for most banks, S&P analyst Nathan Stovall said.

But it’s also true that banks are struggling to make money right now. They make most of their money charging interest on loans, but it’s harder to do when interest rates are as low as they are now, Stovall said. “There is no bank in the country that wants to lose revenue right now.”

Ease of technology

So why are banks starting to no longer rely on overdraft fees? Technology is one of the main reasons.

The rise of digital payments, online banking and other financial technologies means that customers can easily and quickly track their account balances. It also means that banks can deploy new tools to take advantage of these capabilities.

“Technology has enabled banks to deliver as much information as customers want, in real time as close as possible,” Ash said.

In April, Fifth Third launched a checking account called Momentum, which includes an overdraft avoidance tool called Extra Time. Customers who overdraft their account will have until midnight the next day to avoid charges by adding money to their account.

Extra Time became available in the Indianapolis market in June.

PNC’s overdraft avoidance feature, called Low Cash Mode, debuted in April. Customers who overdraft their account have a grace period of 24 to 48 hours to remedy the overdraft by adding money to the account. If the customer is unable to do so, they can decide which pending withdrawals to prioritize and which, if any, to cancel.

PNC’s standard policy is to withdraw debits from a customer’s account in the order that those debits were received, Baker said. Low Cash Mode now gives customers more control over this process. “Technology is the catalyst for all of this,” he said.

Since PNC introduced the Low Cash mode, the bank has already sent over 10 million overdraft account alerts. In about 80% of those cases, Baker said, the client remedied the overdraft within the available grace period.

PNC says it expects its overdraft revenues to drop from $ 125 million to $ 150 million, or 50%, as a result of the change.

“There’s no question that the short-term effect of this is considerably less for us in terms of commission income,” Baker said.

On the other hand, he said, helping customers avoid overdrafts – a major source of customer complaints – will make it easier for the bank to attract new customers and retain existing customers.

Competitors, regulators

Indeed, competition between financial institutions is a strong motivation for banks to change their habits in terms of overdraft fees.

Online-only financial services companies such as Chime (founded 2013), Varo Money (founded 2015), and Dave (founded 2017), among others, are creating new competition for banks. And it has only heated up over the past year and a half as the pandemic has accelerated the trend towards digital banking.

These companies, also known as fintechs or neobanks, have attracted many investors who are not yet pressuring them to make a profit. They can therefore afford to keep their fees to a minimum to attract customers.

“The investment community has given them considerable lead to be truly disruptive,” Stovall said.

Baker of PNC and Ash of Fifth Third both acknowledged that financial technology companies are among the factors that have driven traditional banks to develop their own digital games in recent years.

“Technology has absolutely forced us – in a good way – to make the best digital products possible,” Baker said.

Other pressures could also be at play.

Part of that pressure comes from lawmakers and regulators, Stovall said. “You hear about it from a lot of different places. “

In March 2020, federal regulators urged banks to waive overdraft fees and other charges in light of the pandemic. In May this year, Senator Elizabeth Warren, a Democrat from Massachusetts, made headlines at a Senate Banking Committee meeting when she berated JP Morgan Chase CEO Jamie Dimon, for the bank’s overdraft practices in the event of a pandemic.

In November, Regions Bank revealed that it was under investigation by the Consumer Financial Protection Bureau for its overdraft policies and practices. The investigation remains ongoing.

The CFPB also fined the regions $ 7.5 million in 2015, claiming the bank charged customers for overdraft coverage services that customers had not agreed to sign up for, in violation of federal law. Regions reimbursed customers over $ 49 million as part of this 2015 action.

The Regions, which operate 25 branches in the Indianapolis area, plan to launch a checking account by the end of this month that will charge a monthly fee, but no overdraft fee. The bank has also made other changes, including lowering its maximum daily overdraft fee and improving the account alerts it sends to customers.

On a call with analysts in July, regions CFO David Turner Jr. said the bank expects its overdraft fee income to decline 10 to 15 percent from levels in the past. ‘before the pandemic because of these changes.

In class

lynn toops

Litigation could also help make overdraft fees less attractive, said Lynn Toops, a partner at Indianapolis-based law firm Cohen and Malad LLP. “There’s a ton of litigation around overdraft fees, so this could be a reaction to that.”

Cohen and Malad have started suing banks for their overdraft practices over the past five years, Toops said, after previous court rulings convinced the company that this was an area of ​​opportunity.

Since then, she said, her firm has litigated “probably hundreds” of such cases across the country and secured dozens of class action settlements that have recovered tens of millions of dollars for clients. banks.

“We won a lot more than we lost,” Toops said.

His victories include a case against Cincinnati-based First Financial Bancorp, which was filed in U.S. District Court for the Southern District of Indiana. First Financial settled the case last quarter for $ 3.8 million, the bank said in a financial filing.

Toops’ pending overdraft charge cases include a June filed in Delaware County against Muncie-based First Merchants Bank and a July 2020 filed in Marion County against Jasper-based German American Bank. The parties in the German-American case are attempting to resolve this dispute through mediation.

In all three of these cases, Toops uses a breach of contract argument. The cases allege, among other things, that banks assess overdraft fees in a way that violates terms and conditions that customers had agreed to. •

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