Smaller banks are still relying heavily on overdraft fees, and there seem to be few sustainable options to overcome such a dependency.
Overdraft fees made up 48% of all service charges during the first quarter at banks with $1 billion to $10 billion in assets, based on call report data filed with the Federal Deposit Insurance Corp. In comparison, such fees made up a third of total service charges at larger banks. (Banks with less than $1 billion in assets do not have to provide detailed data on service charges.)
Relying on a single type of fee could prove increasingly problematic for community banks, industry observers said. The challenge, however, will involve finding new revenue streams to help smaller institutions diversify.
Smaller banks "are not in the business of gouging their customers, but they need to be looking for new alternative sources of noninterest income to boost overall shareholder value," said Philip Smith, president of the law firm Gerrish McCreary Smith.
Annual nonsufficient funds charges are declining across the banking industry, falling from $140 per debit card in 2005 to $60 last year, according to the consulting firm Cornerstone Advisors. Average annual fee income per retail checking account is also declining, the firm said.
Regulation, which has been cutting into the profitability of overdraft programs, is likely to continue as the Consumer Financial Protection Bureau aims to weigh in, said Brad Smith, managing director of technology solutions at Cornerstone. Banks with less than $10 billion in assets could still draw scrutiny from other regulators, he said.
"The dramatic reduction in consumer checking profitability is really changing banks' business models," Smith said, noting that institutions are dramatically reducing their focus on consumer banking. "A lot of banks don't talk about retail much anymore."
While hard-pressed to find ways to substantially replace overdraft fees, some institutions are starting to do "all sorts of creative things to drive more debit card usage," which in turn should increase debit interchange fees, Smith said.
Annual debit interchange per card nearly doubled from 2005 to 2014, to $69, Cornerstone reported. Existing regulation allows banks with less than $10 billion in assets to charge higher interchange rates.
Monthly maintenance and ATM fees are another area that banks could pursue, though those are tricky, experts said. Maintenance fees only made up 11% of service charges at banks with $1 billion to $10 billion in assets, while ATM fees contributed 6% of the total. The percentages are roughly consistent with those of bigger banks.
It can be difficult for institutions, especially smaller ones, to increase ATM fees, which often take place when people use machines that do not belong to their bank, industry experts said. One strategy could consist of placing ATMs in high-traffic locations, such as airports or sports stadiums, where noncustomers likely need cash, said Steven Reider, founder of Bancography.
Bidding for such spots is often competitive, and banks typically need a certain amount of scale before such an ATM strategy can contribute a meaningful amount of revenue, Reider said.
"The difficulty is any one ATM can't earn a lot of money," Reider said. "It has to be multiplied a hundredfold. That strategy is really reserved for the largest banks."
Community Bank System in Dewitt, N.Y., generates roughly 2% of its operating revenue from ATM fees, according to SNL Financial. Community Bank System tends to have ATMs in rural locations where there are few options and noncustomers may be vacationing and in need of cash, said Scott Kingsley, the $7.5 billion-asset company's chief financial officer.
Still, there is no concerted strategy to drive significant revenue from ATM fees, Kingsley said. "It is really just a convenience factor, but we are seeing less ATM usage," he said.
Reduced ATM use is a concern for all banks. A rise in electronic banking options is prompting people to rely less on cash, which will likely cut into ATM fees, industry experts said.
Some banks have been experimenting with monthly maintenance fees. Bank of America, for instance, launched an account last year with a $4.95 monthly fee that doesn't include overdraft. Banks may also insist that customers meet certain requirements to avoid monthly maintenance fees.
Requiring direct deposit for paychecks is a popular prerequisite, said Thomas Parliment, chairman and chief executive of Parliment Consulting Services. Doing so would generally make someone a "core customer, and that's something banks battle for," he said.
"The bank wants to incent you to have a profitable relationship," Parliment said. "If I can be your primary transaction vehicle, then I can depend on that money. I would rather be that than receive the monthly fee. It's the Holy Grail."
Overall banks are struggling to persuade clients that they should be paying for banking services, Kingsley said.
"For you to have a productive and profitable institution, noninterest income sources are an important feature of that," Kingsley said. "The bank needs to get paid. You pay for your cable bill and cellphone bill, so there needs to be an understanding that you have to pay for banking as well."