How 2022 hastened the decline of overdraft fees

December 19, 2022 9:00 PM

What started as a trickle of overdraft-fee policy changes in 2021 became a flood in 2022 as a growing number of large and midsize banks made their policies more consumer-friendly.

The list includes megabanks like Citigroup, which this year became the largest U.S. bank to eliminate overdraft fees entirely, and Wells Fargo, which recently launched a new small-dollar loan program to help customers avoid overdraft charges.

It also includes regional banks such as Charlotte, North Carolina-based Truist Financial, which dropped all fees tied to transactions that get rejected because the customer lacks sufficient funds, as well as charges for overdraft protection transfers.

The pressure on banks to reform overdraft policies has been mounting for years, with consumer advocates and lawmakers arguing that such policies are particularly harmful to lower-income customers. More recently, Biden-era regulatory changes and competition from lower-cost online competitors have put pressure on large banks to reconsider their strategies.

Here's a look back at American Banker coverage from 2022 that highlights the evolution of overdraft policy.

More big banks pull back

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Bank of America made a big splash in January when it announced plans to slash its overdraft fee from $35 to $10.

While the move may have appeared less aggressive than Ally Financial's decision to completely eliminate such fees, analysts said Bank of America's size and status as the No. 2 bank in the country by assets could spur other banks to reduce what they charge customers who spend more than they have in their accounts.

Just two weeks after the Charlotte, North Carolina-based megabank's announcement, First Citizens BancShares in Raleigh, North Carolina, cut its overdraft fee to $10. A few weeks later, Buffalo, New York-based M&T Bank, said it would lower its overdraft charge this year from $35 to $15.

Banks eliminate NSF fees

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By the end of December, fees charged to consumers whose purchases get denied because their accounts lack sufficient funds will be largely a thing of the past at the nation's largest banks.

Thirteen of the 20 biggest U.S. commercial banks eliminated nonsufficient-funds fees as part of broader overdraft reforms, and four more were scheduled to do the same by the end of this year, an American Banker analysis in August found.

In August 2021, by contrast, all but two of the top 20 banks charged the fees. It remains to be seen whether the rapid demise of NSF fees will flow down to smaller banks.

Tallying the cost of reform

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The changes that banks are making to their overdraft-related policies are coming at a cost, research this year showed.

The reforms were set to save customers of large and regional banks more than $4 billion a year, according to a June analysis by the Pew Charitable Trusts. Pew said the savings amount to about 26% of the overdraft fees that all banks charged in the last year before the COVID-19 pandemic.

A more recent Bankrate.com report offered additional insight. Based on research this summer, it found that the average overdraft fee was $29.80, or 11% lower than a year earlier. That's a shift from the previous 22 years, when overdraft fees rose steadily from less than $22 to more than $33.

Average NSF fees fell even more sharply to $26.58, down 21% from the prior year, the report found.

One example of how individual banks are being affected: KeyCorp recently said it expects to lose about $25 million per quarter in deposit-service fee income because of overdraft changes. The Cleveland-based parent of KeyBank has dropped NSF fees and lowered its overdraft fee to $15.

The impact on smaller banks

F.N.B. Corp. - First National Bank of Pennsylvania

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Some smaller banks are also tweaking their overdraft programs, though generally on a more limited scale than their larger competitors.

F.N.B. Corp., the Pittsburgh-based parent of First National Bank of Pennsylvania, announced this fall that it planned to cut its overdraft fee from $37 to $35, and to reduce its NSF fee from $37 to $29.

The changes are expected to go live in the first quarter of next year.

Like some of its larger counterparts, F.N.B. is rolling out two products that may allow customers to avoid overdraft fees — a short-term, small-dollar loan that will allow consumers to apply digitally and receive funds quickly and a secured credit card that will enable customers to build their credit.

Both products are scheduled to be available next year, the $43 billion-asset company said.

Federal regulators form a united front

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Regulators appointed by President Biden continued their campaign in 2022 to reduce the industry's dependence on overdraft-related income.

In March, acting Comptroller of the Currency Michael Hsu warned in an op-ed: "Banks that hesitate to adopt pro-consumer overdraft programs will soon be negative outliers."

Then in August, the Federal Deposit Insurance Corp. threatened to bring enforcement actions against banks that it supervises if they charge multiple NSF fees on the same unpaid transaction.

And in October, the Consumer Financial Protection Bureau issued guidance stating that banks are likely violating the law if they charge overdraft fees to customers who had enough money in their account to cover the purchase at the time the bank authorized the transaction.

Also this year, the CFPB ordered Regions Financial to pay a $50 million penalty in connection with certain allegedly illegal overdraft fees.

Blue states add to the pressure on banks

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Even as federal regulators have been targeting overdraft fees, state officials in New York and California have also taken steps this year that could further erode the revenue source.

The New York State Department of Financial Services recently issued guidance that asks state-chartered banks and credit unions to curb certain overdraft-related fees.

Meanwhile, the California Department of Financial Protection and Innovation is implementing a new state law that requires state-chartered banks and credit unions to begin disclosing the amount of revenue they generate from overdraft-related fees.

The California law hits smaller banks and credit unions that are exempt from federal disclosure rules. Institutions must submit the information by March 1, 2023, the agency said.