Discover Financial Services is eliminating most fees on its consumer deposit accounts — a move that figures to generate more low-cost funding for the company’s consumer lending businesses without sacrificing substantial revenue.
Starting Monday, Discover Bank is no longer charging fees for having insufficient funds to complete a transaction, falling below a minimum balance requirement, stopping payment on a check, or making more than six withdrawals in a month from a savings or money market account.
The online bank had previously stated that it would charge fees of $10 to $30 in those situations, though it is unclear how frequently the fees were actually assessed. In May 2018, Riverwoods, Ill.-based Discover announced that it would automatically waive the first fee that a depositor incurred each year.
Even compared with other digital banks, which typically charge lower fees than brick-and-mortar firms, Discover has been collecting scant fee revenue from depositors. In the first quarter of 2019, the bank just reported $562,000 in service charges on deposit accounts, including $314,000 in overdraft-related charges.
One reason that overdraft revenue was so low is that Discover had adopted several policies favored by consumer advocates. For instance, the bank has not been charging a fee when a customer seeks to make an in-store debit card purchase without having sufficient funds in the account. Instead, the transactions are simply declined.
The new policy on overdrafts will cover online bill pay, checks and electronic transactions. Checking customers who are not enrolled in overdraft protection will no longer be charged a $30 insufficient funds fee when one of those transactions gets declined.
Service fees on consumer accounts at Discover — which were charged on checking accounts, in addition to savings and money market accounts — amounted to less than one-tenth of 1% of the company’s net income in the first quarter.
In an interview, Discover vice president of deposits Arijit Roy predicted that the lost revenue will be offset by deeper customer relationships, noting that existing customers responded favorably to the fee waiver policy that was introduced last year.
“Over time, what we’ve found is that more and more customers are starting to open up second accounts with us without being asked,” Roy said. “We think that this will help separate ourselves in the marketplace.”
Discover offers 1% cash back to checking account customers who make debit card purchases, and the elimination of fees gives the $109 billion-asset bank another message in its marketing efforts. The only fees that the bank will continue to charge are for outgoing wire transfers.
“We do expect to talk to our customers and prospects a bit more about this,” Roy said.
But he also indicated that Discover, which heavily markets its flagship credit cards, will continue to move carefully in its efforts to build its deposit franchise.
“We want to be very, very deliberate about how we scale the marketing up,” Roy said.
At the end of the first quarter, deposits made up 49% of Discover’s total funding. The firm had $47.7 billion in direct-to-consumer and affinity deposits, which was up 16% from a year earlier.
Roy said that he believes the elimination of fees will allow the bank to accelerate deposit growth.
