6 reasons banks are monitoring overdraft fees

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Banks have been revamping their overdraft programs and policies over the past year in response to proposed new government regulations and competition from low-fee bank startups.

Five major banks recently announced reforms, including reduced fees and limitations on the maximum number of charges per day, which could save consumers more than $2 billion a year and improve the financial wellbeing of millions of low-income consumers who are disproportionately affected.

Here are six developments impacting the overdraft fee landscape that have the industry watching closely.

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A changing environment

The traditional bank overdraft program may soon be a thing of the past as banks continue to rethink their overdraft fees and make them more consumer friendly in a wide-ranging set of reforms, according to Acting Comptroller of the Currency Michael J. Hsu.

While many banks have yet to fully embrace the change, the momentum has clearly shifted toward pro-consumer reform of the overdraft system that will help improve the financial wellbeing of millions of low-income consumers who are disproportionately affected. 

But the incentive for banks to adapt is clear: customer loyalty. Customers who believe their financial institution is working to improve their financial health are more loyal, committed customers, according to a Financial Health Network study.

Read more: Don't be the last banker to update your overdraft program 
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Billions at stake in overdraft fee changes

In a “watershed month for boosting consumer protections,” five major banks announced changes to their overdraft fee programs in January, which could benefit consumers by more than $2 billion a year, according to research by The Pew Charitable Trusts.

To come up with the figure for potential consumer savings, the analysis looked at revenue projections from Truist, U.S. Bancorp and Regions, and estimated similar projections for Bank of America and Wells Fargo..  

“For those who are underbanked and who use payday loans and other forms of high-cost lending, these changes over time could be worth billions of dollars a year,” said Alex Horowitz, principal officer in Pew’s consumer finance project. However, the impact of such industry wide changes remains to be seen.

Read more: U.S. consumers stand to save billions from banks' overdraft reforms 
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Balancing the books

Citizens’ aptly named Peace of Mind overdraft policy, aimed at reducing fees and charges for customers, was launched in October last year. The bank, however, anticipates that its estimated $40 million in lost fee income will be covered by cost savings and customer service benefits. 

While service charge and fee income dropped 4% from the same period in 2020 to $100 million, the bank was quick to note that calls and complaints to the firm’s customer service center have also gone down by 40% since the policy change.

The company’s overdraft policy revision constitutes an early milestone in the industry's movement toward reforming its overdraft programs. 

Read more: Citizens says cost savings will partly offset lost overdraft revenue 
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A growing trend

Increased pressure from regulators, consumers and advocacy groups is paying dividends with KeyCorp announcing plans to overhaul its overdraft fee policies.

The bank’s changes will go into effect in late 2022 and include an overdraft fee reduction from $33 to $20, a limit of three on the number of charges a customer can incur for each and the elimination of fees charged when a transaction is rejected due to insufficient funds. 

The move brings the $181.2 billion company into line with several other banks around the country that are making similar overdraft fee changes. 

Read more: KeyCorp will cut its overdraft fee to $20
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Washington divided

Different perspectives on overdraft fees are stalling legislation on Capitol Hill. For the Republican party, the fees are viewed as a valuable and affordable source of short-term credit for consumers who usually have few other options. Democrats, however, say they are an imposition that has a disproportionate impact on poor consumers of color. 

“In an average year, consumers in the United States pay around $10 [billion] to $12 billion in overdraft fees and nonsufficient fund fees, and just 9% of consumers take up 80% of those overdraft fees,” said subcommittee Chair Ed Perlmutter, D-Colo, pointing toward the high burden on those with low income.

But a contrasting view exists. “The actions of this committee aim to reduce consumers’ ability to access short-term liquidity financial products,” said Rep. Blaine Luetkemeyer, R-Mo. “I ask my colleagues, where are the 40% of American consumers supposed to go when they need a $40 loan?”

Read more: Lawmakers spar over government intervention in overdraft 
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Ending overdraft fee dependence

Another large bank reduced its reliance on overdraft fees with Ameris Bancorp eliminating fees charged for insufficient funds when a payment is returned, among other revisions to its overdraft program. 

“These changes are designed to make banking easier and to recognize that many of our customers are working hard to improve their financial standing,” said CEO Palmer Proctor.

Driven by regulatory pressure from the Biden administration, as well as increased competition from low-fee bank startups, the industry’s current overdraft policy rethink will provide relief for customers with low balances who are often disproportionately impacted by overdraft fees.

Read more: Ameris Bancorp to join crowd curbing overdraft fees 
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