Bank Overdraft-Fee Revenue Bounces Back

March 16, 2017

Banks and other financial firms in 2016 generated the highest level of fees in seven years related to overdrafts on checking accounts, marking a turnaround for a charge crisis-era regulation tried to rein in.

So-called overdraft fees totaled $33.3 billion in 2016, up about 2.5% from 2015 and by 5.4% from 2011, according to Moebs Services Inc., an economic-research firm. Overdrafts occur when consumers make transactions that are larger than their checking-account balance.

Most banks will cover the shortfall, no matter how little in savings or assets the consumer has, in exchange for what is usually a hefty fee.

The 2016 fees were the highest since 2009, the year before the Federal Reserve implemented a rule that stopped banks from automatically charging consumers overdraft fees on debit-card and automated-teller-machine transactions. Instead, the rule required banks to get permission from consumers before charging a fee for such transactions. Such fees can run as much as $45 a transaction, according to Moebs Services, although the median fee across banks and other financial institutions is $30.

Banks opposed the rule, warning overdraft-fee revenue would tumble since it meant a smaller pool of consumers would face such charges. But the fee revenue didn’t stay down for long.

After initially dropping, overdraft-fee revenue remained steady at just shy of $32 billion, before starting to pick up around mid-2015, according to Moebs data. The 2016 growth rate was the largest annual increase since 2009.

Analysts said the revenue growth isn’t unusual given the overdraft rules have been in place for some time. And it “is likely tied to new account growth the industry is experiencing,” said Matthew Keating, senior equity research analyst at Barclays who covers midsize banks.

Some consumer advocates, though, have criticized new bank strategies to get consumers to enroll in overdraft services. Those, they say, include wrongly presenting the service as mandatory for new customers or emphasizing scenarios in which people are tight on cash and the feature could help them.

A survey by the Pew Charitable Trusts, a proponent of overdraft regulation, found some 52% of consumers who have paid a debit-card overdraft fee don’t recall opting in to this service.

Banks “have continuous exams with regulators and any hint of wrongdoing is something that would be picked on very quickly,” said David Pommerehn, associate general counsel and vice president at the Consumer Bankers Association. He added that limited availability of credit for subprime borrowers has contributed to the rise in overdraft-fee revenue. Consumers with low credit scores and little to no savings are using overdraft services as a short-term financing option.

Overdraft-related fee revenue at the 10 largest U.S. retail banks by assets that report this data totaled about $7.5 billion in 2016, up 4% from a year prior, according to S&P Global Market Intelligence. Both this and Moebs Services data also include additional fees such as when consumers bounce checks or arrange for bill payments larger than their checking account balance.

Those transactions aren’t part of the Fed’s opt-in requirement, which means that checking-account users can incur them without signing up for any specific service. The increase in these figures suggests these types of transactions might be up as well.

One implication of the rising revenue is that consumers may be growing more comfortable spending more than they have, even if it comes at a cost. There were nearly 1.12 billion overdraft transactions in 2016, up from nearly 1.09 billion a year prior and 1.07 billion in 2014, according to Moebs Services.

Another possibility is that banks are getting many new and existing customers to opt-in to overdraft services, having stepped up campaigns in branches and online promoting the feature. More enrollment generally corresponds to a larger number of overdraft transactions, said Michael Moebs, economist and chief executive at Moebs Services.

Wells Fargo posted a 9% increase to reach $1.78 billion in overdraft-related revenue in 2016. Photo: Micah B. Rubin for The Wall Street Journal
Some banks’ growth rate was much higher than the industry average. Wells Fargo & Co., for example, posted a 9% increase to reach $1.78 billion in overdraft-related revenue in 2016. A bank spokeswoman said this was partly due to customer growth and increased transaction activity.

She added that customers can enroll in low-balance alerts and that the bank is in the process of introducing a zero-balance alert that will be sent intraday when a customer’s available balance is zero or negative.

Several large banks, including J.P. Morgan Chase & Co., Bank of America Corp., and U.S. Bancorp, said year-over-year revenue increases ranging from around 1.5% to 3% are the result of account growth as more people sign up for checking accounts.

Overdraft revenue is also up at credit unions. It reached an all-time high of $6.2 billion last year, according to Moebs Services.

While overdraft revenue is rising, the Consumer Financial Protection Bureau is testing ways to improve consumer understanding of disclosures to ensure consumers understand what they are signing up for.  Last year, CFPB director Richard Cordray sent a letter to the largest 25 retail banks encouraging them to create accounts that help consumers avoid overdrawing.

The regulator announced in January that it filed a lawsuit against TCF National Bank for “tricking consumers” into overdraft services, which included enrolling people who said yes to a question over the phone about wanting their debit card to continue to work as it had been. The CFPB also said the bank asked new customers about opting in “immediately after a series of mandatory items the consumer had to agree to in order [to] open the account…most consumers fell into the rhythm of initialing the terms of the agreement and signed on.”

The bank said it disputes the CFPB’s claims, has filed a motion to dismiss the agency’s complaint and believes its overdraft programs comply with applicable laws and regulations.