Cost of Overdrafts on Rise as Reg Action Looms
The overdraft picture is getting clearer.
Government data released last month showed overdraft income at the largest banks had risen considerably in the first quarter, but exactly how they were making that happen was unclear.
Higher prices appear to be a big contributor, according to newly available data. Banks of all sizes have raised fees over the last several months, and big banks have raised them the most.
At a time when most banks are finding it harder to make money from overdraft fees, new data shows that Wells Fargo, Bank of America and JPMorgan Chase are bucking the industrywide trend. The numbers are renewing consumer-protection concerns ahead of a CFPB rule-writing process set to begin later this year.June 6
The agency posted its semiannual rulemaking agenda on a blog late Wednesday updating the next steps it will take on several areas of rulemaking. The CFPB expects to issue rules for prepaid reloadable cards, mortgage servicing and mortgage disclosures this summer but set no specific deadlines yet on overdraft and debt collection.May 19
Banks with more than $1 billion of assets are now required to report overdraft income in their call reports. Data released Wednesday reveals which banks rely most heavily on revenue from overdrafts and which could be most vulnerable to looming changes in overdraft regulations.May 28
Banks with at least $10 billion in assets raised overdraft fees an average of 50 cents from March to June, to $33.66 per overdraft, according to data collected by Market Rates Insight in San Anselmo, Calif. Institutions with $1 billion to $10 billion in assets increased fees an average of 14 cents during the same period, to $32.77; those with $100 million to $1 billion in assets hiked fees an average of 2 cents, to $30.79.
Banks are raising overdraft fees to compensate for tight profit margins on lending, said Rick Barham, chief executive at Market Rates Insight.
"Rates are not rising as expected, which is affecting margin," Barham said. "Financial institutions are simply pivoting to new revenue sources."
And they are also trying to bolster prices before regulators drop the hammer on overdrafts and curtail transactions, said Michael Gladshteyn, vice president of information technology at Market Rates Insight.
"They're trying to secure more-stable income, should the CFPB limit overdrafts," Gladshteyn said.
The Consumer Financial Protection Bureau is expected to begin writing rules for overdraft fees later this summer, amid criticism from advocacy groups that overdrafts gouge consumers. In February the CFPB told the 25 largest retail banks to begin offering and promoting products that help consumers avoid overdrafts.
Some banks may be making up for related fees they have eliminated amid the higher scrutiny, too.
Many banks have stopped charging for transferring money from a backup account to cover overdrafts; those were fees to protect customers from incurring more-expensive overdraft charges.
JPMorgan Chase is said to be on the verge of eliminating its $10 overdraft transfer-protection fee.
A number of large banks are charging well above their peer group’s average. The $96 billion-asset KeyCorp in Cleveland and the $13 billion-asset Sterling National Bank in Montebello, N.Y., each charged $39 per overdraft, for some of their products and in certain circumstances, as of June 30. That was the highest fee among all banks with at least $10 billion in assets, according to Market Rates Insight.
"KeyBank clients have a choice of checking account options that can help limit or even eliminate overdraft fees," said KeyBank spokesperson Drez Jennings, who added that the bank also offers a no-overdraft product.
Sterling does charge $39 for overdrafts and the bank "actively promotes its overdraft-protection plan," spokeswoman Linda Dunbar said.
Factors other than higher fees have boosted some banks' overdraft revenue.
Interestingly, neither Bank of America, JPMorgan nor Wells has raised overdraft fees in the past four months. B of A and Wells each charges $35 per overdraft for most of their checking-account products. JPMorgan charges $34 for most of its products. However, they have increased their overall deposit bases, which has led to increased overdraft revenue.
Meanwhile, some banks have stepped up marketing efforts around overdrafts, in part because of requirements they disclose more information about the program.
But the market and regulatory pressures on the business are fierce.
Overdraft revenue at the $14 billion-asset BancorpSouth in Tupelo, Miss., fell 0.5% to $6.9 million in the first quarter from the year-earlier period, according to Federal Deposit Insurance Corp. data.
Dan Rollins, BancorpSouth's chief executive, cited the CFPB for his bank's drop in overdraft revenue. And he said consumers are more savvy now when it comes to managing their money.
"Consumers are smarter today. I think all the publicity that's out there certainly has impacted the consumer," Rollins said at a June 14 investor conference.
BancorpSouth charges $36 per overdraft for most of its checking products.
Stated another way, bank customers know more than they used to about how much banks charge for various products and services. That has led consumers to make smarter decisions about how and when to use overdrafts, Christopher Maher, CEO at the $2.6 billion-asset OceanFirst Financial in Toms River, N.J., said during an April 22 conference call.
"One of the downsides to having all this online information about your account is people are less likely to overdraw," Maher said. "They know exactly what their account balances are."