Update 588 — Focus on Bank Fees:
Overdraft Overhaul; is Junk Next?
The specter of the first full-scale war in Europe since 1945 has hit the U.S. economy directly and immediately via capital market sell-offs, to be followed by energy and commodity price hikes and ways to be determined. Perhaps mundane by contrast is the auspicious market response to heavily negative public sentiment regarding overdraft and other retail banking fees.
In January of this year, Capital One got rid of all overdraft fees and non-sufficient fund (NSF) fees. Other banks have followed suit by curbing or eliminating overdraft fees. Long-standing legislation in Congress to stem fees has a new lease on life — HFSC just announced a hearing on eliminating overdraft fees on March 31 — in a rare case of a virtuous cycle.
On Tuesday morning, First Interstate Bank joined a long list of other financial institutions in reducing its overdraft and non-sufficient fund (NSF) fees. In recent months, many banks have adopted a series of reforms to curb one of the most harmful practices in the industry: overdraft and NSF fees. The shift comes following a mixture of pressures from within the industry and regulatory community to curtail, and even eliminate, overdraft and NSF fees.
The Consumer Financial Protection Bureau has taken aim at overdraft and NSF fees alongside a litany of other charges they deem as “junk fees.” In addition, legislation has been moving through Congress to establish a new regulatory floor on overdraft and NSF fees and increase the transparency of overdraft protection programs.
As regulators and advocates began to question the practice of overdraft and NSF fees, they sought to answer a series of questions:
- How much revenue do these fees bring in?
- How dependent are financial institutions on these fees?
- How pervasive is the consumer harm from these fees?
The Consumer Financial Protection Bureau answered these questions in great detail in a December 2021 report. The CFPB found overdraft and NSF fees are significant sources of revenue for financial institutions, reaching $15.47 billion in 2019. JPMorgan Chase, Wells Fargo, and Bank of America alone accounted for 44 percent of total overdraft and NSF revenue by banks with assets over $1 billion. Also, the CFPB stated that overdraft and NSF fees were responsible for two-thirds of overall fee revenues which further illustrates the industry’s heavy reliance on them. Overdraft and NSF fee revenues declined by just over 25 percent in 2020, but the CFPB identified increased checking account balances as a result of government stimulus payments as the main reason for the decrease.
Smaller banks and credit unions charged slightly fewer overdraft fees per account compared to large banks. The CFPB found that 92.9 percent of smaller banks and 60.9 percent of credit unions used overdraft fees. However, smaller organizations were less likely to allow consumers to opt-in to overdraft protection programs and consumer outcomes were similar to those found at large banks. Credit unions and smaller banks that charged overdraft fees earned $42.33 and $40.37 in annual revenue per account, which was only six percent and 11 percent lower than their larger counterparts.
Who pays overdraft fees? In 2017, the CFPB found that less than 20 percent of consumers pay over 90 percent of all overdraft fees, and consumers that pay over $100 in overdraft and NSF fees usually have incomes well below the U.S. average. These charges represent a significant financial burden on lower-income consumers as evidenced by overdraft fees consuming nearly a week’s worth of wages on average.
Overdraft and NSF Fees Revenue
Sources: FDIC, Center for Responsible Lending
The Efforts to Regulate
Overdraft and NSF fees have long been targets for consumer advocates seeking to increase financial inclusion and make the banking industry fairer for consumers. CFPB Director Rohit Chopra took aim at overdraft fees early on in his term. Within two months of being sworn in as Director, Chopra directed the agency to release the December 2021 report referenced above. Highlighting this research, the CFPB launched a new effort to reduce the impact of overdraft and NSF fees along with other exploitative fees. The first step of their initiative is soliciting comments from the public on how best to devise regulations and guidance. While it will take some time for final rules to be devised, the CFPB’s efforts will go a long way in bringing to light exploitation in the industry. Acting Comptroller Hsu also called for overdraft reform back in December. Other federal financial regulators such as the OCC, FDIC, and NCUA must address overdraft fees as well, with multiple legislative pushes to reform overdraft and NSF fees.
Senators Cory Booker and Elizabeth Warren have introduced the Stop Overdraft Profiteering Act of 2021to crack down on overdraft and NSF fees. Their bill would reduce the practice of overdraft fees by prohibiting them from debit card transactions and ATM withdrawals. The bill would also limit the size and frequency of overdraft fees on other transactions such as checks and recurring payments. The banking industry has been skeptical of the bill as it would carve out a significant chunk of their revenue by eliminating the practice of overdraft fees for a large number of transactions.
Over on the House side, Representative Carolyn Maloney has put together a coalition of 44 cosponsors in support of her Overdraft Protection Act. The Congresswoman has been pushing a version of this bill since 2009 following the financial crisis, but recent developments from the CFPB and private sector have reenergized the prospects of moving this legislation. The Overdraft Protection Act increases transparency for overdraft programs, limits the frequency and size of overdraft fees, and eliminates NSF fees on ATM and debit card transactions. It would provide a critical regulatory baseline for the banking industry and a model for the CFPB as it develops its own rules.
The Cycle of Fee Regulations
The banking industry itself has recently taken aim at overdraft and NSF fees. Capital One, JPMorgan Chase, Bank of America, Wells Fargo, Ally, and other large financial institutions have recently announced or completed shifts in their overdraft programs. Some ditched overdraft and NSF fees altogether while others are reducing the frequency and size of overdraft and NSF fees. Greater scrutiny on overdraft fees invited regulators to step in, and the private sector immediately began moving to ensure overdraft fees can be set up on their own terms. But the private sector gave regulators and advocates the evidence they need to prove that overdraft and NSF fees are exploitative and should be curtailed or eliminated via public rules.
Regulators and advocates will need to consider the impact on smaller banks, community banks, and credit unions and make sure they are not at a disadvantage following a regulatory shift. Some worry that severely curbing fees could hurt smaller institutions more reliant on the fees for revenue and don’t have the same revenue diversity and flexibility. A regulatory floor also limits large banks’ ability to claw away customers through the fee differential. Nonbank fintechs like Chime have provided a model for traditional banks to follow. These institutions have begun charging “tips” instead of overdraft fees to evade interest rate limits and other lending laws.
Fortunately, the CFPB is already one step ahead of this new dangerous model with its January 2022 initiative tackling banking fees. The project targets junk fees in general such as late fees on credit cards and unfairly high or obscure fees. The scenario with overdraft and NSF fees could be replicated with other fees now that scrutiny is being applied. As we push overdraft and NSF fees to the curb, advocates should begin to consider what other fees should be targeted next.
Before you go: The Consumer Financial Protection Bureau has put out a Request for Public Commentrelated to overdraft fees and junk fees. If you would like to share your experience with these fees, email FederalRegisterComments@cfpb.gov with Docket No. CFPB-2022-0003 in the subject line of the message. You may also go to http://www.regulations.gov/. We hope you take this opportunity to share your experience and help guide public policy.