A recent analysis of overdraft fees by one of the country’s oldest think tanks included Arvest Bank of Fayetteville on a list of banks that “are no more than check cashers with a charter.”
Topping the list is a Texas bank that operates seven branches in Arkansas under the name First Convenience Bank inside Walmart stores.
“He did not even contact us,” Arvest spokesman Jason Kincy said, disputing the conclusions of Aaron Klein, a senior fellow in economic studies at the Brookings Institution of Washington, D.C.
Klein, in an essay published on Brookings’ website last month, compared overdraft fees collected in 2019 and 2020 by banks with at least $1 billion in assets with the banks’ net income in the same years. Six banks collected overdraft fees that represent more than half of their profits. (Smaller banks may be equally guilty, Klein said, but are not required to report overdraft fee revenue.)
Klein concluded that Arvest, First Convenience and the four other banks on the list had developed “a business model that depends on a single fee, charged only to consumers who run out of money” and that dependence on overdraft fees for profitability is a safety and soundness issue that regulators should not tolerate.
First Convenience Bank — formally named First National Bank Texas and headquartered in Killeen — collected almost three times more in overdraft fees in 2020 than it declared in net income. (No First Convenience official returned a message seeking comment.)
Arvest’s overdraft fees represented 54% of net income in 2019 and 62% in 2020, according to Klein’s research, which found that the average for multistate regional banks was 9% and even smaller for the biggest nationwide banks.
Kincy did not question Klein’s numbers but said they lacked important context. Arvest’s ratio of overdraft fees to net income increased in 2020, Kincy said, not because Arvest collected more in fees but because pre-tax income was down by more than 30%.
Arvest, owned by the family of Walmart founder Sam Walton, is a “heavy retail bank,” Kincy said. “Is it our business plan to drive overdraft revenue? No. Our business plan is to drive retail customers so we can also offer them other services.”
Arvest is, for instance, the largest mortgage lender in Arkansas by a significant margin.
Also, Klein’s essay referred to an overdraft fee of $35, which is close to the 2020 national average of $33.47 reported by Bankrate.com. But Arvest’s overdraft fee is $17, “and it has been that for a long time,” Kincy said. “If our business model was to maximize overdraft fees, our pricing wouldn’t be what it is.”
Klein suggested that “all banks and credit unions should be required to offer a basic, low-cost, no overdraft fee product.” On this, he and Arvest agree.
“We started working on that back in November 2020, and we’re bringing that to market this year,” Kincy said.
In an interview with Arkansas Business last week, Klein acknowledged that Arvest is “not the worst” when it comes to dependence on overdraft fees. “But it is their largest source of profit. The majority of Arvest Bank’s profit is from overdrafts, period, end of story. And not just over one year, but over two years, so it’s not a fluke.”
Klein predicted that the flow of overdraft fees will be threatened by advances in electronic transaction speed. “Amazon can get anything to your doorstep in 48 hours, but Uncle Sam can’t get money into your checking account for six days. That’s going to change,” he said.
For instance, Wells Fargo’s overdraft revenue dropped significantly, Klein said, when it introduced a policy to “rewind” fees if adequate deposits were received by the next morning.
In the meantime, he said, bank customers shouldn’t be allowed to generate so many overdraft fees. “Maybe their debit card gets declined from time to time… If you don’t have the money to pay for something, you don’t have the money. To pay a $35 overdraft fee on a $10 tank of gas is a pretty bad deal.”
Bank Soundness
Bank regulators, Klein argued, need to see over-dependence on overdraft fees the same way they see over-dependence on any other bank product. “If [banks] were this dependent on commercial real estate, they would be under a supervisory letter,” Klein said.
Arvest is the only state-chartered bank on Klein’s list of “overdraft giants”; the rest are national banks. Arkansas State Bank Commissioner Susannah Marshall said Arvest is operating within its legal parameters.
“Arkansas does not have a state law on overdraft fee limitations — ultimately, that is a business decision for an institution,” she said in an email statement. “Also, there is no statutory restriction on how dependent a bank can be on overdraft income. If a bank utilizes a specific overdraft payment program, various federal laws/regulations are applicable to those programs.”
Lorrie Trogden, president and CEO of the Arkansas Bankers Association, disputed the metric Klein used to make his problem bank ranking — overdraft fees compared with net income. Overdraft fees as a share of revenue (noninterest income plus net interest income) “would be the most accurate metric as it would indicate the share of a bank’s operating revenue that is dependent on overdraft fees,” she said. The American Bankers Association, she said, found that none of the 11 banks in Arkansas with more than $1 billion in assets received more than 8% of revenue from overdraft fees, while several were under 1%.
