OVERDRAFT FEES ARE BIG MONEY FOR BANKS
Some banks count on the fees, but others are moving away from the practice
Consumeradvocates have long decried overdraft fees, calling them abusively high and accusing banks of using sneaky practices — such as manipulating the way they process payments— to rack up the most fees.
For their part, banks generally defend the fees as necessary to cover costs and to discourage customers from overdrawing their accounts — writing checks, for example, for more money than they actually have.
One thing is for sure: Overdraft fees are big money. Financial firms took in an estimated $31 billion in overdraft revenue nationwide in 2020, according to Moebs Services, a provider of financial data.
But such fees clearly are bigger business for some banks than others.
The Pittsburgh Post-Gazette analyzed revenue at the region’s top banks, ranking them by how much they collected in consumer overdraft fees on average per account in 2019. Figuresfrom 2019 were used to better reflect a typical year. Overdraft revenue fell about 10% industrywide in 2020, owing to stimulus payments and enhanced jobless benefits that helped people pad their bank accounts during the pandemic. In addition, many banks waived some servicefees when COVID-19 hit.
The Post-Gazette’s research showed a wide disparity in overdraft revenue — ranging from a high of $43.71 per account collected by Citizens Bank to a low of $16.04 at Bank of America.
First National Bank, this region’s third-largest retail bank, ranked second, taking in an average of $38.24 per account. PNC, the region’s and state’s biggest bank, landed toward the bottom at an average of $22.93 per account. (Seechart)
Aaron Klein, senior fellow in economic studies at the Brookings Institution in Washington, D.C., who has been studying overdraft fees for several years, found that dependency on them varies widely among financial institutions from being a sidedish to the main course.
“It’s very clear that how banks design their accounts and how they run their back office operation can create more or fewer overdrafts,” he said.
To their credit, a few banks — including Pittsburgh-based PNC — are making efforts to help their customers avoid such fees, he said.
“Overdrafts are pure profits for banks,” Mr. Klein said. “There is almost no risk they won’t get paid back.”
Going negative
Banks can boost overdraft revenue in a number of ways.
One way has to do with how banks process payments. Some resequence checks and debit card transactions and clear them from highest amount to lowest, instead of processing them in the order they come in. The practice makes it more likely an account will go negative and trigger multiple overdraft fees.
Overdraft fees aren’t cheap, averaging around $35 a pop. Banks typically limit the number of such charges assessed in one day, but Mr. Klein found limits as high as eight per day. According to a 2017 report by the U.S. Consumer Financial Protection Bureau, one out of 11 consumers pays at least $350 a year in overdraft fees.
Roughly a decade ago, a number of big banks shifted away from reordering payments from high-tolow after paying millions of dollars to settle class-action lawsuits over the method, including Pittsburgh market leader PNC Bank. But others have continued the practice.
In 2017, a Post-Gazette survey of the area’s top 10 banks found only FNB reordering both checks and debit card transactions from high to low. Citizens and Dollar Bank also cleared checks from high to low, but processed debit card transactions in theorder they were presented.
A spokeswoman for FNB last week said the bank still processes checks from high to low, but now clears debit card transactions in chronological order — a switch it made in 2018. Citizens and Dollar also continue to process checks from high to low.
A bank’s clientele can be a factor in generating overdraft fees.
For example, Mr. Klein said, Woodforest National Bank, a community bank in Texas, locates most of its branches at discount stores like Walmart.It takes in some $135 per account in overdraft fees, roughly 25 times what giant Citibank collects at justover $5 per account.
Mr. Klein’s research found consumer overdraft revenue at banks ranged from an average of about $5 per account up to about $150.
MARKET At the high end, he ran across six relatively smaller banks that he calls “overdraft giants” that counted on overdraft fees for a majority of their profits. For three of those banks, overdraft revenue exceeded total profits, meaning they wouldn’t be able to survive without those fees. He reviewed two years’ worth of data to help ensure results weren’t an anomaly.
“Their business model is about finding people likely to overdraft, and getting as much overdraft out of them” as possible, he said. “That’s a problem that should not be allowed.”
Mr. Klein noted that it was hard to know how many banks employ “predatory” overdraft practices. Financial institutions with assets below $1 billion are not required to disclose their overdraft revenue, while no credit unions are required to do so.
Based on his research, Mr. Klein said the amount in overdraft fees collected per account by Citizens Bank and FNB was high.
“Five dollars [per account] is about as good as you are going to find,” he said. “Anything over $35 is high.”
No-overdraft ‘Bank On’ accounts
A spokeswoman for Citizens said the Rhode Island-based bank recently introduced a student checking account with no overdraft or other fees. “We are assessing the competitive landscape and looking at new ways to help our customers bank better,” Rory Sheehan said in an email last week.
Citizens’ overdraft revenue dropped to an average of around $30 per account in 2020. But overdraft revenue fell for the rest of the region’s top banks, too, mirroring the industry.
A spokeswoman for FNB said the Pittsburgh-based bank last year began offering an all-electronic checking account with no overdraft fees.
All banks and credit unions should be required to offer lowcost, no-overdraft accounts to their customers, and actively promote the accounts, in Mr. Klein’s opinion. “Overdraft fees have ballooned over the last 30 years into a reverse Robin Hood [situation] by which those living paycheck to paycheck become profit centers for certain
banks. That’s not right,” he said.
Last year, the American Bankers Association encouraged banks nationwide to consider offering certified “Bank On” accounts. In general, the accounts only require $25 to open, have no minimum balance and charge a monthly fee of no more than $5. They must offer free electronic statements, free debit cards and free access to online banking.
“Every bank is chartered by the government with a duty to serve their community. It’s not like other businesses,” Mr. Klein said. “Banking is special. With that comes a responsibility not to take advantage of people.”
Mr. Klein blamed the Federal Reserve for contributing to people overdrawing their accounts — especially those living paycheck to paycheck — by allowing a slow payment system.
“People who get paid on Friday don’t know that money was sent by the employer probably on Tuesday. Direct deposits don’t happen immediately,” he said.
“The Fed has the authority to give you access to your money immediately, but they don’t do that. The rest of the world has realtime payments.”
Changing the formula
Some banks have been implementing overdraft reforms on their own.
Mr. Klein commended PNC for introducing a new product this year called “Low Cash Mode” available to the bank’s electronic “Virtual Wallet” customers.
The system alerts customers when their balances are low. If the balance is negative, it gives them options for avoiding an overdraft fee by putting more money into the account or reversing payments that triggered the overdraft. Customers typically will have 30 to 40 hours to resolve the overdraft. The bank also is limiting overdraft fees on the accounts to one per day, down from four.
The bank’s CEO, Bill Demchak, called the industry’s current reliance on overdraft revenue “unsustainable.”
“We firmly believe that this innovative and differentiated approach will drive significant growth in new and existing customer relationships over time,” he said when announcing the product.