As political pushback builds against overdraft fees, community bankers are attempting to balance the fees with appropriate customer protections.
James Johannes, a University of Wisconsin-Madison finance professor, recently told the Wisconsin Bankers Association in an interview that financial institutions “are rethinking how to generate fees in a more politically acceptable manner.”
“At first blush I don’t see how any bank can extend credit without generating some sort of fee or interest,” said Johannes, director of the Puelicher Center for Banking Education and Aschenbrener chair in finance at the Wisconsin School of Business. He was quoted in an article appearing on the WBA website. “Fees are a four-letter word to many on the left, though, so banks are looking for ways to say they aren’t charging fees. One way is to call the overdraft a line of credit and charge interest.”
In a video interview with BankBeat, Cheryl Lawson, executive vice president of compliance review with financial services consultant JMFA, said in April that community bankers should seek out knowledgeable industry partners to guide their institutions through the minutiae of overdraft services and fees.
“Every financial institution should consider investing in a partner who can become their eyes and ears on the ground to really help them make a strong overdraft solution,” Lawson said. Especially as changes come down with regulatory personnel under the Biden administration, keeping up with regulatory updates is crucial, she said.
To Lawson, community banks must deliver transparent, strong and equitable overdraft fee systems, replacing what she deemed to be a previously discriminatory environment where such situations were sometimes handled based on the personal relationship between the banker and customer. She noted the need to ensure a proper system was highlighted in the recent $16 million settlement involving Navy Federal Credit Union and the estimated 700,000 customers who were expecting to be reimbursed the NSF fees they had paid. She said one potentially litigation-producing pitfall community banks face includes incomplete overdraft disclosures.
“That is a simple thing to get right, but if you screw it up, it is a very costly mistake,” Lawson said. She suggested financial institutions review their overdraft service policies at least annually and communicate with consumers every time they incur such charges to ensure a feeling of partnership.
‘We’re trying to get people away from the payday lending stores’
Some banks are gauging the possibility of eliminating overdraft fees as they could be headed for closer scrutiny by regulators, and as traditional financial institutions increasingly face competition from fintech firms and products such as Walmart MoneyCard. MoneyCard holders are allowed to opt into a program to give them 24 hours to fix a negative balance before they are charged a $15 fee for each purchase that overdraws the account.
As reported by BankingDive, a pair of congressional hearings on Capitol Hill in May served as a perfect setting for Democrats and Republicans to call out the most powerful U.S.-based banks. A pair of Texas-based community banks, First National Bank Texas and Woodforest National Bank, booked service charges that accounted for more than 30 percent of their operating revenue in 2020, according to data from S&P Global. First National reported $100.3 million in overdraft fees and $35.7 million in net income last year, while Woodforest reported $142.4 million in overdraft fees and $128.4 million in net income in 2020.
A number of large banks have already made changes to reduce overdraft fee revenue, while others are reconsidering the fees. Others are introducing new products and offering less-expensive options for customers short on funds. Pressure to eliminate the practice is coming from fintechs: Chime can receive members’ direct-deposited payroll checks into spending accounts, letting their members make debit card purchases that overdraw their account with no overdraft fees. Limits begin at $20 and can be increased to $200. Alliant Credit Union, a digital-only credit union, announced Aug. 5 that it would stop charging customers overdraft fees. Also, Detroit-based lender Ally Bank announced a similar strategy in June.
In another example, the Bank on Greater Milwaukee initiative was launched in 2019 as a program of the Urban Economic Development Association of Wisconsin and seeks to attract the unbanked and under-banked to the traditional financial services system while not utilizing overdraft or non-sufficient fund fees.
“We’re trying to get people away from the payday lending stores, the pawn shop — those types of things — and this was a way in trying on our part to do that,” said Tom Sattler, executive vice president at The Equitable Bank in Wauwatosa, Wis. His organization already has 12 other financial institutions with established accounts: Bank Five Nine, BMO Harris Bank, Chase, CIBC, First Federal Bank, First Midwest Bank, Old National Bank, PNC Bank, U.S. Bank, Wells Fargo and two credit unions — Self Help and Summit.
Studies: Community banks have relatively low overdraft prices, public divided
According to economic research firm Moebs $ervices, community banks, defined as those with less than $100 million in assets, are already displacing their rival credit unions with an average overdraft price at $26, versus credit unions at $28 and large financial institutions even higher at $33.19. The firm found that community banks are offering a $2.14 or 8.1 percent better deal than credit unions at those average prices.
Overdraft revenue in 2020 was $31.3 billion — the lowest since 2005 and a 10 percent drop from 2019. Also, last year saw the lowest number of overdraft transactions in decades and the fewest yearly overdrafts per checking account ever.
“Consumer OD behavior has totally changed,” noted Michael Moebs, CEO & economist, “and banks, credit unions, savings banks plus fintechs need to adjust strategies or see their consumer transaction accounts fade along with a reduction of fee revenue.”
Those statistics come as the general population remains nearly evenly divided over their support for the practice: According to the global intelligence agency Morning Consult, half of U.S. adults say they have overdrafted, with 19 percent saying they have done so in the last 12 months. Forty eight percent of consumers say they support the practice while 52 percent say they do not. The firm found that at least seven in 10 consumers said they would feel more favorable toward their primary financial provider if that provider waived all overdraft fees in general, during the pandemic or for underprivileged customers.