Federal regulations to rein in overdraft charges were supposed to kill a golden goose of the banking industry, but it looks like the nation's largest financial institutions didn't get that memo.
Wells Fargo, Bank of America and JPMorgan Chase — the three biggest U.S. banking companies by assets — are finding ways to squeeze more revenue from overdraft fees. They generated a combined 9% more in overdraft fees during the first three months of 2016 than they did a year earlier, according to new government data.
The rebound follows new rules that curbed overdraft fees, as well as a wave of lawsuits that led to more consumer-friendly policies across the industry.
Meanwhile, hundreds of banks with less than $50 billion of assets saw virtually no increase in revenue from the fees.
Experts are still trying to figure out exactly what caused the disparity between big banks and their smaller peers, but questions are already being asked about the clarity and aggressiveness of overdraft-protection marketing at the big banks.
Richard Barrington, a senior financial analyst at MoneyRates.com, said that some banks have developed messages to persuade more customers to enroll in overdraft programs.
"I think that's unfortunate because obviously at around $30 per occurrence, it's a terribly big expense," he said.
Those concerns could grow louder later this summer when the Consumer Financial Protection Bureau is expected to begin writing rules for overdraft fees. Consumer advocates have long criticized the fees as a way of gouging consumers who maintain low balances.
The Data Divide
The Federal Deposit Insurance Corp. started collecting data on overdraft fees during the first quarter of 2015. The agency provided the latest numbers to American Banker last week; only banks with $1 billion or more of assets are required to submit the data.
At the country's three largest banks, quarterly overdraft charges rose by a total of $104 million over a one-year period, according to the data. The increase was $56 million at Wells; $26 million at JPMorgan; and $22 million at B of A.
At more than 600 smaller banks, overdraft revenue was up in some cases and down in others. Overall, quarterly overdraft charges rose by $57 million at those banks, a little more than half of the increase at Wells, JPMorgan and B of A. That was despite the fact that in aggregate, the 600-plus smaller banks collected more overdraft revenue than the three biggest banks.
Among the smaller banks, almost of all of the increase in overdraft revenue was attributable to 11 banks with more than $50 billion in assets, including U.S. Bancorp, PNC Financial Services Group, TD Bank, SunTrust Bank and Zions Bancorp.
Some observers were hesitant to comment on the disparity between big and small banks, since last quarter was the first time that it was possible to make comparisons with the same period a year earlier.
"I don't think there's enough data to draw a conclusion," said Cary Whaley, a vice president at the Independent Community Bankers of America.
The rise in overdraft fee revenue at some big banks may be at least partially due to the fact that they are expanding their deposit bases.
A JPMorgan spokesman noted that retail deposits at the New York megabank were up 10% in the first quarter compared with the same period a year earlier. Bank of America's consumer banking deposits grew by 7.7% during the same period. Wells Fargo increased average deposits in its retail banking division by 6.2%.
But the FDIC data also shows that at all three megabanks, overdraft fees rose as a percentage of noninterest income between the first quarter of 2015 and the same period this year.
At Wells Fargo and Bank of America, overdraft fees also rose as a percentage of service charges on deposit accounts, while they were flat at JPMorgan.
Industrywide, revenues from overdraft fees almost certainly dropped sharply earlier this decade — though no solid data was available until early last year — as regulations that took effect in 2010 cut into banks' profits.
Lawsuits challenging the practice of reordering transactions also led to policy changes that cut into revenue.
Regions Financial, which ended its policy of reordering checks and debits from high amount to low in November 2015, was among the banks that reported a decline in overdraft fee revenue between the first quarter of 2015 and the same period last year.
Some observers speculated that the higher overdraft revenue at certain big banks might be the result of more vigorous marketing efforts.
For the past six years, banks have been required to give customers the option of whether they want withdrawals from accounts with insufficient funds to be approved, for a fee that today is often in the range of $30-$35. But the tactics that banks use to market their overdraft programs vary, with some banks hawking the services more aggressively than others.
Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group, told American Banker that the CFPB should investigate whether big banks are using deceptive practices to persuade customers to opt into overdraft programs.
What Will the CFPB Do?
In February 2016, the consumer bureau sent a letter to the 25 largest retail banks urging them to offer accounts that do not charge overdraft fees and to advertise those products.
Joy Hackenbracht, a research officer at the Pew Charitable Trusts, said that banks need to do more to market consumer-friendly accounts. "If we want to help consumers, we need to make sure that they know this is an option that they can use," she said.
Bank of America is among the banks that offer an account that does not charge overdraft fees. Since 2010, B of A has also declined point-of-sale debit card transactions if there is not enough money in the account, which has significantly reduced the incidence of overdrafts, a spokeswoman for the Charlotte, N.C., bank said.
Wells Fargo declined to comment on the overdraft fee data.
One consultant who advises small banks on acquiring customers said he was not surprised to learn that the recent rise in overdraft fees was concentrated among the big banks.
Achim Griesel, president of Haberfeld Associates in Lincoln, Neb., said that regulations and changes in consumer awareness have eaten into overdraft revenues at small banks. His firm's clients, which have up to $15 billion in assets, have seen a 25% decline in overdrafts per customer over the last four years, he said.
"The days of getting overdraft back to its peak levels, on a per-customer basis, are gone," Griesel said.