Wait, was that supposed to happen?
Overdraft fees are a much-maligned practice, but they continue to be a growing source of revenue for many banks, according to new data from the Federal Deposit Insurance Corp.
Each of the 15 largest retail banks posted overdraft revenue growth starting in the first quarter of 2015 — when the FDIC first required certain banks to provide a breakout — through the second quarter of this year. Overdrafts at the $134 billion-asset KeyCorp in Cleveland rose the most during that period: 74%, to $34.3 million.
Some smaller banks also saw overdraft income expand. At the $2.6 billion-asset Canandaigua National in New York, overdrafts rose 180% over the 10 quarters to $2.1 million. The bank made no acquisitions during that period.
For all of 2016, overdraft fees at the 620 banks required to report such data to the FDIC rose 2.2% to $11.4 billion from a year earlier, according to Brian Martin, an analyst at FIG Partners.
Overdrafts have gained popularity even as elected officials and regulators have threatened crackdowns and taken action. The Consumer Financial Protection Bureau in August laid the foundation for increased disclosure requirements. Sen. Cory Booker, D-N.J., recently queried banks whether they’re enrolling customers without their consent. And in January the CFPB sued TCF Financial in Wayzata, Minn., for alleged deceptive and abusive overdraft practices.
The economic recovery is one big reason for the continued expansion of banks’ overdraft business, said Jeff Harper, president of BSG Financial Group, a bank consulting firm in Louisville, Ky.
“It seems counterintuitive, but when consumer confidence rises, you see a spike in overdrafts,” Harper said.
The growth has occurred without banks resorting to fee hikes. Since the FDIC’s overdraft disclosure requirements took effect two years ago, the national average overdraft fee has barely budged, according to the financial data provider RateWatch. The average fee for covered checks rose 91 cents to $34.07, while the average for returned checks increased 87 cents to $34.06.
Banks are also doing a better job of explaining to customers what they are getting into when they opt in for overdraft protection, Harper said. Wells Fargo, for example, has started providing e-mail alerts to help customers avoid overdrafts.
“You’ve got to do right by the customer,” said Michael Keim, president of the $4.5 billion-asset Univest Bank & Trust in Souderton, Pa. “If you’re reliant on punitive fees to generate noninterest income, that’s not where the focus should be.”
Even when banks tell customers how much they will pay in fees for overdraft protection, consumers are not scared away because it is a service they need, Harper said. If anything, the clear disclosures may be bringing attention to the product.
“The examiners think that people are spending too much money on overdrafts, but if you need to get your car fixed or you need to keep your water from being cut off, you’ll go ahead and pay the overdraft fee,” Harper said.
Although overdraft revenue has picked up at some community banks, the expansion has mostly come at larger banks, which have had more success at adding customers, said Achim Griesel, president of the bank consulting firm Haberfeld Associates in Lincoln, Neb.
“At the average community bank, in terms of the number of customers per branch, it has stayed flat,” Griesel said.
Larger banks are also generating more revenue from another category of deposit service charges. Revenue from credit card transaction fees surpassed overdraft revenue for the first time last year, according to Mike Moebs, a Lake Forest, Ill., bank consultant. Big banks are using their scale to subsidize rewards programs to lure new credit card customers.
However, it’s not all bad news for community banks when it comes to deposit service-charge growth. Community banks can beat larger rivals on debit-card-transaction fees because of the Durbin amendment’s price caps on debit card fees for large banks, Moebs said.
In fact, there should be plenty of room for all three categories to continue to strengthen —overdraft fees, as well as credit and debit card transaction fees — as long as banks avoid the practice of keeping customers in the dark, Harper said. Regulators will keep demanding transparency, he said.
“Banks are focusing more on training employees how to handle account openings,” Harper said. “They have done a better job of explaining customers their options.”