Banks earning less from overdrafts, but critics still find fault

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There’s much for banks to like — and for consumer advocates to dislike — in a report on the industry's overdraft policies released Tuesday by the Center for Responsible Lending.

Using data compiled from the Federal Deposit Insurance Corp., the nonprofit consumer advocacy group found that banks with $1 billion of assets collected $11.45 billion in overdraft fees in 2017, up only slightly from the $11.44 billion they collected a year earlier.

It also showed that, as a percentage of noninterest income, overdraft revenue declined slightly year over year, from 5.1% in 2016 to 5% in 2017.

Banks can point to these numbers as evidence to show that their efforts to help consumers avoid or minimize overdraft fees are working.

Facing stiff criticism from consumer advocates, many banks in recent years have adopted more customer-friendly overdraft policies, such as providing alerts when balances get low and waiving overdraft fees on small-dollar purchases. They have also created so-called safe accounts that are set up so that customers can never overdraw their accounts and therefore never incur overdraft fees.

But the Center for Responsible Lending doesn’t see it that way. In a news release Tuesday, the group said that the fees banks charge for overdrafts are “abusive” and harm families “living paycheck to paycheck.”

In an interview, Peter Smith, the senior researcher at the CRL, said that overdraft fees, which typically range between $34 and $36, are often much larger than the transactions that trigger the charge in the first place.

“We hope for fees that are reasonable and proportional to the size of the overage,” Smith said.

He also pointed out that since 2015, total revenue generated from overdraft fees has actually increased by 2%. (The Federal Deposit Insurance Corp began publishing information about overdraft fees in 2015.)

One of the major reasons for the increase, according to Smith, is that banks have profited from broader changes in consumer behavior — including a preference for automatic bill pay and recurring monthly charges — that have made it more difficult for low-income customers, in particular, to manage their money.

“There are a huge number of passive payments,” Smith said.

Many customers overdraw their accounts because they forget recurring charges, and therefore miscalculate the amount of cash they have on hand, Smith said. Additionally, given the rise in mobile banking, customers can more easily check their balance in real time, but no longer balance their checking accounts in the way they did when paper checks were more popular.

“Every bank and every retailer and every recipient of a bill is encouraging you to enroll in bill pay,” Smith said.

The report comes amid renewed interest in overdraft charges in Washington.

Senate Democrats last week introduced legislation to ban overdraft fees on debit card transactions and ATM withdrawals. The measure, sponsored by Sens. Sherrod Brown, D-Ohio, and Cory Booker, D-N.J., would also prohibit banks from charging more than one overdraft fee per month and no more than six overdraft fees per year.

Smith said the CRL supports the legislation, which is likely to face stiff opposition from Republicans. Still, it could become a front-burner issue if Democrats regain a majority in either the House or Senate in the midterm elections.

“We believe Democrats see this as important to voters,” Jaret Seiberg, an analyst with Cowen, said in a research note to clients this week.

Many banks have modified their overdraft practices in recent years in an effort to quell criticism from consumer groups.

JPMorgan Chase and Citigroup, for instance, no longer charge overdraft fees on ATM withdrawals. Bank of America and Wells Fargo, meanwhile, do not charge fees on accounts that have negative balances for extended periods of time.

Yet even as large banks have borne the brunt of consumer advocates’ criticism of overdraft fees, it’s small and regional banks that are relying most heavily on the fees to bolster their bottom lines, according to the report.

“Sometimes small banks are offenders, too,” Smith said.

In its report, the CRL listed the 20 banks that charged the highest volume of overdraft fees in 2017. Two of the smallest banks on the list — the $5.7 billion-asset Woodforest National Bank in The Woodlands, Texas, and the $1.9 billion-asset First National Bank Texas in Killeen — generated nearly 40% of their noninterest income from overdrafts.

The industry average is 5%, according to the report.

Several regional banks also rely heavily on overdrafts to drive noninterest income. Overdraft revenue accounted for 32% of fee income at TD Bank last year, 17% at Regions Financial and 14% at BBVA Compass.

At the biggest banks — including JPMorgan Chase, Capital One and Citigroup — overdrafts accounted for a lower-than-average portion of noninterest revenue.

Of course, the biggest banks have more sources of fee income than smaller banks do, so it stands to reason that their overdraft revenue as a percentage of fee income would be lower than that of smaller banks.

But even when viewed another way — overdraft revenue as a percentage of income from deposit service charges — the trends are similar. According to the CRL report, overdraft fees accounted for nearly half of all service charges at Regions, TD Bank and SunTrust Banks and more than two-thirds of service-charge income at Woodforest and First National Bank of Texas. At the $83.5 billion-asset USAA, overdrafts accounted for 88% of all service charges.

By comparison, overdrafts made up about a third of all service fees at Bank of America and Wells Fargo, and accounted for just 11% of Citigroup’s service-charge income.

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Overdrafts Consumer banking Fee income Law and regulation JPMorgan Chase