Banks Hike Overdraft Fees After Regulatory Clampdown Hits Revenues

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Over the last few years, the country’s largest banks have drawn heavy criticism for making millions by activating overdraft facilities for all account holders and by reordering transactions so as to extract maximum penalties from these customers. These practices spawned a series of class action lawsuits against the banks in 2010-2011, and the Consumer Financial Protection Bureau (CFPB) stepped in with stricter rules to curb them (see Overdraft Fees Reexamined Following Banks’ Bumper Results). While all the big banks – including JPMorgan Chase (NYSE:JPM), U.S. Bancorp (NYSE:USB) and Bank of America (NYSE:BAC) – have settled the lawsuits over the years, the CFPB has kept a close eye on them, as industry data indicates that these measures have been ineffective in lowering the overdraft burden on customers (see U.S. Banks Watchdog Raises Questions About Overdraft Policies).

The reason is not because the banks have found a loophole in the rules. They have simply hiked their overdraft fees, and are marketing overdraft facilities more heavily to customers. ((Overdraft Fees at Banks Hit a High, Despite Curbs, Wall Street Journal, Apr 1 2014)) As a result, although total overdraft fees generated by banks in the country fell from the record high level of $37.1 billion in 2009 to $31.6  billion in 2011, the figure nudged higher to $31.9 billion in 2013. In the current low interest rate environment in which interest revenues are under significant pressure, the banks seem to be doing what they can to ensure that the regulatory restrictions do not shrink their fee revenues.

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Overdraft practices and fees by banks have been a topic of considerable deliberation since the economic downturn of 2008, when it was discovered that at least 29 prominent U.S. banks rearranged debit card transactions to process the largest transactions first, so that the customer incurs more overdraft fees (a larger transaction would put a customer’s account below zero faster, so overdraft fees would be charged on a greater number of transactions). [1] The banks also did not notify customers using a debit card at a merchant outlet that the particular transaction would entail an overdraft – simply clearing the payment and imposing the overdraft fee in such cases. This led to a series of lawsuits against the banks, almost all of which have been resolved now. Most notable among these were the settlements by Bank of America for $410 million, Citigroup for $285 million, Wells Fargo for $203 million, Citizens bank for $137.5 millionJPMorgan for $110 million and U.S. Bancorp for $55 Million. Moreover, the CFPB mandated a series of controls for the banks, which were largely implemented by the end of 2011.

As banks fell in line with these new rules, overdraft fees fell 17% between 2009 and 2011, only to increase slightly in 2012 and 2013 due to the increase in overdraft fees across banks. Data collected by economic research firm Moebs Services shows that the median overdraft fee for the industry has increased year-on-year from $25 in 2008 to $30 in 2013. [1] Moreover, banks are increasingly advertising overdraft facilities among customers by playing on their fears of being in a situation where they are slightly short of the cash required for a transaction. The growing number of customers voluntarily opting for overdraft services indicate that they believe the additional costs are worth it.

The net impact of the growing overdraft fees and higher adoption seems to outweigh the downside presented by regulatory changes as far as the banks’ fee revenues are concerned. As can be seen in the chart below, U.S. Bancorp’s fee revenues as a percentage of its deposit base fell quite drastically from 2008 to 2012. But the figure seems to be stabilizing, and we expect it to remain around current levels in the future. You can see how changes in these fees affect U.S. Bancorp’s share value by making changes to this chart.

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Notes:
  1. Excessive Bank Overdraft Fee Lawsuits, Bank-Overdraft [] []