Community banks should “review and innovate” their overdraft policies and pricing as more pressure is placed on financial institutions to do so, according to the tech and data company Curinos.
The company released its 2021 Competition Drives Overdraft Disruption study last month. The report relied both on internal and external research relating to overdraft trends and statistics.
Challengers, including fintechs and charter banks, that adopt “consumer-friendly policies” earn more market share and have a 40 percent improvement in account acquisition since 2017, while financial institutions that have not done so suffered a 30 percent loss in consumer acquisition, according to the report.
Curinos found that financial institutions have a chance “to develop short-term, small dollar lending or credit products (possibly leveraging behavioral economics) to replace overdraft over time.” The report called on regulators to offer more clarity and consistency to help financial institutions in introducing overdraft alternatives. According to the firms, banks should differentiate themselves from competitors to become more attractive.
Overdraft fees fall as banks change practices
Regulators have signaled their desire to reform overdrafts for more than a decade: FDIC best practice guidelines in November 2010 called for banks to eliminate overdraft fees on relatively small dollar amounts and enact daily limits on the number of overdraft fees a consumer could incur. Earlier this year, the Brookings Institution urged the Consumer Financial Protection Bureau to crack down on overdraft fees, citing six community banks where overdraft fees consisted of more than half of net income. Overdraft fees have also been criticized for disproportionately affecting Black and Latino communities.
Overdraft fee revenue has already fallen from $40 billion in 2008 to $17 billion in 2019 — approximately 57 percent. Also, Curinos found that fewer people are using overdraft services: The percentage of regular overdraft users — 10 or more transactions per year — fell by 40 percent to less than 5 percent of the population between 2010-20. The report revealed that more than 60 percent of overdrafts are from consumers who intend to use the service, and more than 4-in-5 overdraft transactions came from consumers who opted into overdraft programs to cover their payments. “Consumers want more short-term liquidity choices,” the report states. “Consumers seek convenient and relevant alternatives to overdraft.” Still, according to Curinos, a majority of consumers, though favoring some new regulations limiting overdraft expenses, would reconsider their support if it limited their access to overdraft coverage.
Already, many of the largest U.S. banks have significantly changed or altogether ended their overdraft fees: Bank of America no longer charges such fees and instead declines transactions when accounts could be overdrafted. Huntington Bank has a 24-hour grace period, and PNC’s Low Cash Mode offers no non-sufficient funds fees and a maximum of one $36 overdraft item fee per day.