Overdraft Fees: Holding the Moral High Ground

An early financial services trend of 2022 involves big banks announcing plans to eliminate or dramatically reduce overdraft fees.

Capital One kicked off the process in December, with Bank of America and Wells Fargo quickly following suit—each of the three putting its own spin on the ball.

These fees have long been a sore point with consumers, are attracting increasing regulatory scrutiny, and have been shown to disproportionately impact a small segment of (presumably lower-income) consumers.

A December Consumer Financial Protection Bureau (CFPB) report found that 9% of consumer accounts pay 80% of these fees. Therefore, it’s no surprise the announced changes received widespread media coverage and kudos from some consumer advocacy groups.

Unfortunately, credit unions’ positive actions haven’t generated the same headlines. Amplify Credit Union in Austin, Texas, and University Credit Union in Los Angeles took similar steps in January.

Alliant Credit Union in Chicago and Westerra Credit Union in Denver also eliminated such fees before the big banks acted.

The term “overdraft” itself is somewhat misleading. Much of the coverage uses it as a catch-all for a pool that includes nonsufficient funds (“NSF” or “bounced check”) fees. It also encompasses overdraft protection, the opt-in service through which a financial institution transfers funds from a linked account to cover a negative balance.

The combined NSF/OD fee category generated $15.5 billion in 2019, according to CFPB—roughly one-third of it by Wells, Bank of America, and JPMorgan Chase alone. 

Even the Federal Reserve does not distinguish between fees triggered by checks versus debit card/ACH transactions, but the rapid ascent of this category clearly mirrors increased debit card use.

A timely report from the Filene Research Institute indicates something many of us suspected: credit unions’ overdraft protection fees are roughly half of banks’ rates. 

The study found other NSF-related credit union rates to be nominally lower as well. 

A closer look at the big banks’ fine print is also in order. While Capital One appears to have truly zeroed out all “overdraft” categories, Wells and Bank of America eliminated only the NSF fee—the smaller slice of the pie. 

Bank of America reduced its overdraft rate from $35 to $10. Wells held its fee at $35 but added a 24-hour grace period to remedy an overdraft. 

These are clearly customer-friendly moves, but “eliminated fees” is an overstatement. The changes also aren’t effective until March 31.

The largest banks can afford to be more magnanimous on overdrafts, as their diversified portfolios offer more opportunities through which to offset lost revenue. 

Member-centric credit unions face a complex challenge in simultaneously countering big bank messaging while covering the cost to provide a valuable service that involves incremental risk and back-office effort. 

Filene’s report explores how member segments use overdraft protection and begins a dialogue on alternative models that might better fit their needs. 

The challenge for credit unions is to retain the moral high ground, both in reality and in the court of public opinion. 

Large banks are staying ahead of regulators by addressing a long-term disadvantage. Despite the volume of their megaphone, the broader financial services industry should not allow these banks to portray their catch-up moves as taking the vanguard on a consumer issue.

Credit unions can point to their superior long-term record on NSF/OD. They can encourage current and prospective members to read banks’ fine print, where they’ll likely discover the pocketbook reality doesn’t match the headlines. 

They can join the growing list of credit unions revisiting their overdraft fee structures—a trend that seems all but inevitable. 

Most of all, they can tell the story of proactively seeking new cost-effective ways to meet the short-term cash-flow needs critical to an important subset of members.

GLEN SARVADY is managing principal at 154 Advisors.