U.S. consumers set to save billions with bank overdraft reforms

In one of the first efforts to assess the impact of recent overdraft fee reforms, new analysis finds changes underway at just five banks could save consumers more than $2 billion a year.

The Pew Charitable Trusts reviewed announcements from Bank of America, Wells Fargo, US Bancorp, Truist Financial and Regions Financial last month to determine how much money each company could lose in fees.

These five banks all unveiled new overdraft programs over the course of nine days in January, which Pew called “a watershed month to strengthen consumer protections” in the banking industry.

“For those who are underbanked and using payday loans and other high-cost forms of lending, these changes over time could be worth billions of dollars a year,” said Alex Horowitz, senior manager of the consumer finance project from Pew.

The ultimate impact of the changes — both at the five banks studied by Pew and elsewhere — will depend on how American consumers react. In addition to reducing overdraft fees and making it easier to avoid fees, some banks are introducing small dollar loans that could replace a checking account overdraft.

The $2 billion estimate could rise, depending on how much borrowers from the five banks end up saving by tapping into small loans, Horowitz said.

Bank of America and US Bancorp already had small dollar loans, up to $500 and $1,000 respectively, before announcing revisions to their overdraft policies. Wells Fargo, Truist and Regions plan to roll out such loans, from $500 to $750, later this year.

The loans will be especially helpful to customers who frequently use overdrafts as short-term credit and therefore incur substantial fees, Horowitz said. Pew research showed that 18% of bank account holders pay 91% of all overdraft fees in the United States.

The fact that more banks are offering low-end loans “is a very, very positive change,” Horowitz said. “They offer cash with time to repay…and customers need help repaying.”

the drastic changes come as large and medium-sized banks are under pressure both regulators and competitors to reduce their reliance on overdraft fees.

Some banks are waiving fees charged when overdrawn customers unsuccessfully attempt to make a purchase, as well as fees charged when a negative balance is covered by a transfer from a linked account. Some banks give customers longer grace periods before charging fees or limit the number of fees customers can incur each day. In one a pair of casebanks are dropping overdraft fees entirely.

Over the past four weeks, United States retail banking unit of the Toronto-Dominion BankFirst Citizens BancShares in Raleigh, North Carolina and M&T Bank in Buffalo, New York, also announced changes to their overdraft programs.

Pew reached the $2 billion figure by analyzing revenue projections for Truist, US Bancorp and Regions, and estimating similar numbers for Bank of America and Wells Fargo, Horowitz said.

Truist expects his changes to result in an annual decrease of approximately $300 million overdraft revenue — nearly 60% of the company’s total — by 2024.

Regions estimates that service charges on its deposit accounts will be 20% to 30% less than the $729 million it raised in 2019. And US Bancorp expects it lose 160 to 170 million dollars into annual royalty revenue when all of its changes are implemented.

Across the U.S. banking industry, revenue from overdraft fees increased between 2016 and 2019, eventually reaching $17.2 billion, according to a recent analysis by consulting firm Curinos.

But overdraft fee revenue fell sharply in 2020, partly because banks temporarily dropped fees to help customers manage the early days of the pandemic, but also because customers had more money on their cards. accounts due to government stimulus programs.

The growing number of banks changing their overdraft programs is “clearly extremely positive and frankly long overdue,” said Rob Levy, vice president of research and policy at the Financial Health Network, a nonprofit group focused on health. financial well-being.

In particular, adding more low-value loan options is “one piece of the puzzle” in reducing consumers’ reliance on overdrafts, Levy said. Despite a few banks recently cutting prices, standard overdraft fees have long hovered around $30-$35.

Small dollar loans are also key to getting more people into the banking system and keeping them there, Levy said. “The ads we’ve seen seem to be structured in a much better way – low fees, transparent, accessible,” he said.

Since eligibility for small loans appears to be based on an established relationship with the bank, not the customer’s credit rating, the loans should help increase inclusion in the banking system, he added. .

While banks take significant action, it remains to be seen how the changes will ultimately affect customers and how much banks will ultimately lose in overdraft fee revenue, Levy said.

“The question is, what will happen to the behavior of high-frequency overdrafts after these changes, and therefore the vast majority of fees, that come from them?” said Levy.

“If the changes mean that they have fewer overdrafts … and the number of fees paid by this group goes down, then we will see a serious reduction in fees and, therefore, a reduction in income for the banks.”

Joseph E. Golightly