As political and regulatory pressure builds, large retail banks have garnered much of the attention for reducing their dependence on overdraft/NSF fees.
Though generally slower to change those practices, some community and regional banks are also reducing their reliance on overdraft/NSF fees, both to eliminate a customer pain point and generate goodwill with consumers.
One example is the $6.5 billion, Iowa City-based MidWestOne Bank, which became one of the first community financial institutions in the Midwest to reduce its dependence on overdrafts this past spring.
MidWestOne eliminated charges for transactions of $5 or less that caused an account to overdraw; reduced the maximum number of daily overdraft fees to four from five; and eliminated a previous $10 fee for transfers between deposit accounts to cover overdrafts.
Its Overdraft Flex program allows eligible customers to avoid a fee when they overdraw by $50 or less. All negative balances must be resolved within 35 days. Negative balances 60 days or older result in a closed account.
For nine months prior to the program’s rollout, bank marketing, compliance and retail executives held regular meetings. They evaluated the overdraft/NSF fee policies of competitors operating in their markets, including any de minimis amounts or maximum number of daily overdrafts.
“We didn’t rush through the process, even though it was trending among the larger, national banks, the money-center banks,” said Senior Vice President Peggy Hudson. “We knew that they were out there in that space, and we liked the idea of trying to bring our own program to market in a way that would set us apart, that would differentiate us from our competition.”
Bank leaders relied on internal data to measure the impact overdrafts were having on customers. Research showed that people of all demographic segments sometimes overdraw their accounts, either by accident or on purpose, Hudson said. “We wanted to eliminate a pain point for our customers, and we wanted to try to provide them with some options to avoid an overdraft,” she said.
Marketing played a key part in the rollout. MidWestOne launched a TV commercial and print, digital and social media advertising leading customers back to the bank website. The policy is now advertised on the bank’s main page, similar to how MidWestOne advertises for other revenue-generating products and services.
Instead of looking to recoup the approximately $400,000 that MidWestOne expects to lose annually by changing its policy, administrators opted to instead use the changes to build loyalty among their existing customer base, compete with both larger banks and credit unions, and reduce the number of overdraft-related customer complaints. Though bank revenue figures and customer numbers haven’t dramatically changed during the program’s first few months, Hudson noted that MidWestOne has received positive public feedback.
For other banks considering overhauling their overdraft policies, Hudson said the change “has to be aligned with the mission and culture of the bank.”
“It made sense for us to do that,” she said. “I know not every bank feels the same way about the philosophy behind it or feels comfortable. It’s a big change.”
MidWestOne is indicative of a growing trend of banks moving away from overdraft/NSF fees. Since June 2021, at least 31 banks announced they were eliminating overdraft charges, reducing fee amounts or relaxing related rules.
Green Bay, Wis.-based Associated Bank has eliminated: NSF fees when an item is returned; overdraft protection transfer fees; and its continuous overdraft fee. It has also reduced its daily limit of overdraft fee occurrences to two from four. The changes are expected to reduce the total cost of overdrafts to consumers by approximately 30 percent.
Grand Forks, N.D.-based Alerus eliminated customer NSF fees and reduced its dependence on overdrafts. The $3.3 billion bank increased the amount an account can be overdrawn before incurring overdraft fees to $50 from $5. Alerus financial further reduced or eliminated overdraft-related fees for consumers and small business clients, including providing overdraft protection accounts at no cost for consumers and doing away with extended daily overdraft charges.
Brian Schumacher, Alerus consumer segment and wealth management director, noted that regional and community banks have been slower to change their overdraft/NSF fee structures than their larger counterparts.
“We’re proud to be a leader among community banks in updating our NSF and overdraft program fees to provide clients greater cash flow flexibility and grace when they experience temporary shortfalls,” he said. “Not only is it the right thing to do for clients, it aligns with our mission to positively impact our clients’ long-term financial potential.”
BOK Financial Corp., Tulsa, Okla., and Simmons First National Corp., Pine Bluff, Ark., are expected to announce overdraft changes later this year, according to S&P Global.
Consumer Financial Protection Bureau research shows that small and midsize banks collected 20 to 25 percent less in overdraft/NSF fees last year than in 2019 as a large influx of consumer deposits entered the banking system during the pandemic.
Politics at play
Banks are moving away from overdrafts as political and regulatory pressure continues to build. Though no bills restricting the use of overdrafts have passed Congress this year, several have been introduced.
The House Financial Services Committee passed a bill this summer restricting the number of overdraft charges banks can issue. Sponsored by Rep. Carolyn Maloney, (D-N.Y.), the bill would amend the Truth in Lending Act and prohibit banks from charging customers multiple overdraft fees in a month and more than six in a year, regardless of whether a customer opts in.
The fate of the bill is now in doubt after Maloney was defeated in a primary race in August. A separate bill introduced by Sens. Cory Booker (D-N.J.) and Elizabeth Warren (D-Mass.) would ban overdraft fees on debit card transactions and ATM withdrawals, and limit overdraft fees for checks and recurring bill payments.
Regulators are also expressing discontent over overdraft policies and have spoken out numerous times over the last year on the issue.
The CFPB announced this summer that it is examining overdraft fee practices at 20 unidentified banks “for further examination and review.” The agency also recently launched an initiative to reduce what it calls “exploitative junk fees” charged by banks and financial companies. Director Rohit Chopra is pledging to take a stronger stand against bank overdraft and non-sufficient fund fees by enhancing supervisory and enforcement scrutiny of financial institutions “that are heavily dependent on overdraft fees.”
Acting Comptroller of the Currency Michael Hsu said late last year that new rules and credible enforcement threats are needed to bring the overdraft reforms his organization seeks. He called on banks to recalibrate their overdraft programs, possibly by requiring customers to be able to opt into overdraft programs and providing a grace period before charging overdraft fees; allowing for negative balances without triggering overdraft fees; and offering balance-related alerts.
‘They’re all evaluating’
Cornerstone Advisors Managing Partner Jim Burson isn’t sure whether regulators will enforce overdraft changes or are trying to coax banks into doing so on their own. Regulators haven’t been granted new power to oversee overdraft policies since a 2010 law requiring financial institutions to offer customers proactive opt-ins and de minimis fees for small dollar overdrafts.
Community banks that decide to reduce their dependence on NSF/overdrafts face more hurdles in making up for lost revenue than larger financial institutions and will need to rely on growing their operations to do so, Burson noted. Community banks are generally more focused on commercial banking than the often-retail-centric large banks. He doesn’t expect that community banks will need to quickly decide to move away from overdrafts.
As more banks reduce their dependence on overdrafts, small institutions will need to consider switching to a set overdraft maximum fee limit, or implement a daily cap on the number of daily overdrafts a customer can incur, Burson said. “Outside of the large players and the regional players, and some credit unions, most community banks haven’t taken much action yet, but they’re all evaluating it,” he added.
Community banks should not feel pressured to change their overdraft policies, said Kirk Hovde, managing principal/head of investment banking of the Hovde Group. Larger banks have been faster to either reduce or eliminate overdrafts because they handle the vast majority of assets and deposits and draw more outside attention, he added. Though political pressure to reduce overdraft dependence will likely continue, Hovde said even strident critics of the practice sometimes agree to drop related bills as smaller bank constituents provide feedback.
“I don’t think you’ll see as much of this in the community bank space, because there’s just less focus on it in the media and in the public sphere,” Hovde said. “You might get some banks that try to make a statement for themselves in their market by eliminating that, but I think you’ll see community banks by and large be slow to adopt this new movement.”
Banks can more than make up for lost overdraft/NSF fee revenue by starting to charge mid-sized commercial customers for everyday treasury management tasks, noted Marci Malzahn, president of the Twin Cities-based financial consulting firm Malzahn Strategic. Though community banks have been slower to do so than their larger counterparts, many mid-sized businesses are willing to pay for treasury management tasks, providing smaller banks with a profitable source of income, Malzahn said.
A popular service
The American Bankers Association and Independent Community Bankers of America have consistently expressed opposition to the current set of overdraft reforms. The ABA noted in June that banks already offer consumers many account options, many of which do not include overdraft protection. This includes Bank On-certified accounts, which are offered by financial institutions representing 56 percent of the deposit share.
Despite political pushback to overdraft/NSF fees, banks must also consider that many customers value overdraft protection. Nearly 90 percent said they were pleased with their bank and found overdraft protection valuable, according to a Morning Consult study undertaken on behalf of the ABA earlier this year. Three in four who had paid an overdraft fee in the past year were glad their bank had covered that payment, rather than declining or returning it.
Cornerstone’s Burson said overdrafts and NSF fees undoubtedly present customers with value. “It is not predatory,” he said of the fees. “People have an option of whether they opt in or not. They don’t have to opt in. There’s lots of ways to avoid overdrafts. It’s an individual choice of a consumer.”