Community Banks Juggle Anti-Overdraft Pressures with Preserving Fee Income

Many community banks might not be willing to give up overdraft revenue despite growing pressure to defray the practice from both competitors and regulators.

Overdraft fee income constitutes a larger part of community banks' operating revenue than it does for larger banks. In the third quarter, the median ratio of overdraft fees to operating revenue across community banks between $1 billion and $10 billion in assets stood at 0.84%, compared to 0.67% among banks above $10 billion in assets. Banks under $1 billion in assets do not have to report overdraft revenue.

While community banks are not yet feeling as much political and regulatory pressure as the larger banks, many are beginning to rethink their overdraft practices to proactively respond and preserve the attendant noninterest income, experts said.

"They're in a much more precarious position because their overdraft fees account for a much larger portion of the overall profit," said Justin Hayden, managing principal at consultancy firm Capco, in an interview. "A lot of these community banks won't survive if they turn around and cut it off one day without having any planning in place to offset the revenue."

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