Overdraft Fees Reexamined Following Banks’ Bumper Results
It has been just over two months since JPMorgan Chase (NYSE:JPM) settled with disgruntled customers who took it to court for wrongly charging them excessive overdraft fees. Bank of America (NYSE:BAC) had already cleared its dues over overdraft-related lawsuits last November, while Citigroup (NYSE:C), U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC) are still battling in courtrooms against similar charges leveled against them. But looks like concerns among customers and regulators over overdraft practices from the country’s biggest banks are far from over, as is evident from the Consumer Financial Protection Bureau’s (CFPB) decision to scrutinize the overdraft practices of 9 banks. [1]
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Overdraft practices and fees by banks have been a topic of considerable deliberation the last two years, since it was determined that the banks wrongly made millions of dollars each year by charging hefty overdraft fees after rearranging transactions to process the largest transactions first.
The inflated overdraft fees led to higher fee income for banks per transaction. This is captured for JPMorgan in the chart below.
JPMorgan and Bank of America settled their overdraft lawsuits in recent months by agreeing to pay customers $110 million and $410 million respectively (see JPMorgan Gets a Bargain in Overdraft Settlement Deal and Bank of America Settles Debit-Card Overdraft Lawsuit)
But the CFPB started having doubts about the effectiveness of the controls it imposed on overdraft practices in recent years when a research report showed that overdraft fees earned banks a significant $31.6 billion in 2011 – not much lower than the $33.1 billion in 2010. [1] The regulator is hence expected to review the disparity in overdraft fees among banks besides indications that banks are wrongly getting customers to sign up for overdraft facilities through advertising the service inappropriately.
This is not a very good news for banks who are already struggling to make up for the loss in revenues from limits imposed on the fees it can charge customers per swipe. A clampdown on overdraft fees presents a sizable downside to the $31.6 billion revenue source.
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Notes:- Nine U.S. Banks Said to be Examined on Overdraft Fees, Bloomberg, Apr 20 2012 [↩] [↩]