US consumers can save billions with bank overdraft reform

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

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 a nine-day period in January, which Pew called “a game changer in strengthening consumer protections” in the banking industry.

“For those who are underserved and using payday loans and other forms of costly lending, these changes could be worth billions of dollars a year over time,” said Alex Horowitz, senior executive of Pew’s consumer finance project.

The eventual impact of the changes – both at the five banks Pew surveyed and elsewhere – will depend on how US consumers react. In addition to reducing overdraft fees and making fee evasion easier, some banks are introducing microloans that could serve as a substitute for a checking account overdraft.

The $2 billion estimate could be higher depending on how much borrowers at the five banks end up saving by taking out small loans, Horowitz said.

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

The loans are particularly helpful for customers who frequently use overdrafts as a short-term loan and therefore incur significant fees, Horowitz said. Research from Pew showed that 18% of bank account holders pay a whopping 91% of all overdraft fees in the United States.

Having more banks offering small loans “is a very, very positive change,” Horowitz said. “They offer liquidity with payback time… and customers need help with payback.”

the comprehensive changes come as large and mid-sized banks come under pressure from both sides controller and competitors to reduce their reliance on overdraft fees.

Some banks are eliminating fees charged when overdue customers try unsuccessfully to make a purchase and fees charged when a negative balance is covered by a transfer from a linked account. Some banks give their customers longer grace periods before charging, or limit the number of charges customers can incur per day. in one some casesBanks completely waive overdraft fees.

In the last four weeks The US retail banking unit of Toronto-Dominion BankFirst Citizens BancShares in Raleigh, North Carolina and M&T Bank in Buffalo, New York have also announced changes to their overdraft programs.

Pew arrived at the $2 billion number by analyzing revenue forecasts from Truist, US Bancorp and Regions and estimating similar numbers for Bank of America and Wells Fargo, Horowitz said.

Truist expects his changes will result in this an annual decline of about $300 million in overdraft-related revenue – nearly 60% of the company’s total revenue – by 2024.

Regions estimates that service fees will accrue on its deposit accounts 20% to 30% lower than the $729 million it raised in 2019. And US Bancorp believes it will Losing $160 to $170 million in annual fee income when all changes are implemented.

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

However, overdraft fee revenue fell sharply in 2020, in part because banks temporarily lowered fees to help customers navigate the early days of the pandemic, but also because government stimulus programs left customers with more money in their accounts had.

The growing number of banks optimizing their overdraft programs is “clearly overwhelmingly positive and quite frankly long overdue,” said Rob Levy, vice president of research and policy at the Financial Health Network, a nonprofit group focused on financial wellbeing.

In particular, the addition of more small loan options is “part of the puzzle” to reduce consumer reliance on bank overdrafts, Levy said. Despite some banks recently lowering rates, the standard overdraft fee has long been around $30-$35.

Small loans are also critical to attracting and keeping more people in the banking system, Levy said. “The announcements we’ve seen seem much better structured – low fees, transparent, accessible,” he said.

Since eligibility for the small loans appears to be based on an established relationship with the bank rather than the customer’s creditworthiness, the loans should help increase involvement in the banking system, he added.

While banks take important steps, it remains to be seen how the changes will ultimately impact customers and how much banks will eventually lose in overdraft-related fee income, Levy said.

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

“If the changes result in less overdrafting… and the number of fees paid by this group shrinks, then we will see a serious reduction in fees and consequently a reduction in revenue for banks.”

About Bradley J. Bridges

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