Bank Overdraft Fees Fading

Bank Overdraft Fees Fading

Last week, Bank of America and Wells Fargo announced policy changes aimed at reducing the fees customers can incur when they overdraw their accounts, in what was surely a reaction to criticism on the national level from Democrats and consumer advocates.

Capital One and JPMorgan Chase announced similar policy changes in December, and PNC Bank did in April.

Whether Arkansas banks are following this industry trend is unknown, said Lorrie Trogden, president and CEO of the Arkansas Bankers Association. Each bank has its own policy and the ABA doesn’t track those policies, but “what I’ve heard from our banks is that the use of overdraft [by customers] has actually gone down in the last year,” she said.

Trogden believes overdraft use has dwindled in part because more banks are participating in the BankOn Arkansas+ program, which offers low-fee checking accounts that don’t have overdraft fees. That model has even been looked at by other states, she said.

At least one bank, Arvest, brought a similar product online in August 2021. Spokesman Jason Kincy said the launch of Arvest Bright Solutions — a basic low-cost, no-overdraft-fee checking account — went well, and customers have opened hundreds of accounts.

Aaron Klein, senior fellow in economic studies at the Brookings Institution of Washington, D.C., said banks should show the public they’re serious by automatically transferring the account of every person who had a certain number of overdrafts within a certain period to low-fee accounts.

Klein wrote an opinion article last spring that named Arvest as one of six banks that made more than half their profits from overdraft fees. Only banks with at least $1 billion in assets are required to report overdraft fee revenue.

A Texas bank that operates seven branches in Arkansas under the name First Convenience Bank inside Walmart stores topped the list, but it did not respond to interview requests. Arvest was the only state-chartered bank on the list; the rest were national banks.

Kincy said in an email last week that NSF — non-sufficient funds — revenue as a percentage of preliminary 2021 net income is 22%. It was 57% in 2020 and 48%-59% from 2017-19.

Overdraft revenue was slightly up in 2021, but had not returned to pre-pandemic levels, he said. Kincy added that the bank waived more than $5 million in overdraft fees in 2020, the first year of the pandemic.

Trogden told Arkansas Business last year that the total of overdraft fees as a share of revenue is a more accurate metric of a bank’s dependence on that product than comparing those fees with net income.

Lorrie Trogden

While 2021 figures are not yet available, she said the American Bankers Foundation 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%, in 2020.

Trogden expects to see the same or possibly lower percentages for 2021.

The move by banks to conduct more business online during the last couple of years — with the pandemic accelerating that trend — has affected how many customers overdraw their accounts, said Trogden, with the ABA.

She said more customers are using online alerts about their balances and are better tracking transactions via online banking. One reason is to protect themselves from fraudulent charges.

Some banks are trying technology to help customers avoid overdraft fees, but problems arose with the Federal Reserve’s antiquated payment system, causing payments to take days to show up in accounts, Klein said.

He doesn’t see that changing soon, but Trogden said Arvest is participating ina pilot Fed instant payment program. Banks add more ways every day for customers to manage and accounts, he said.

“So I think all of that has come together to bring that dependence on overdraft fees down,” Trogden said.

While most banks are “doing the right thing … a handful of banks find themselves unable to pivot and are still defending an outdated and predatory system, relying on Washington’s inability to get anything done,” Klein said.

Klein says industry leadership is not enough to solve the problem. Action by legislators and regulators is needed.

Trogden has a different take. She emphasized that most bank customers want to be able to overdraw their accounts in an emergency, and those who don’t can opt out.

Trogden said banks charge overdraft fees because covering charges for customers who overdraw their accounts is a liability for them, since they may not be repaid for those overdrafts. At the same time, covering those charges increases merchants’ confidence in the system because it reduces bounced checks and debit card transactions that customers can be taken to court over.

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