How PNC responded to customers' complaints about overdraft fees

PNC Financial Services Group has unveiled a new service that it says will give customers more control of their checking accounts so they can avoid overdraft fees.

Overdrafts have been “the No. 1 aggravation point for our customers,” Chairman and CEO Bill Demchak said in a call with reporters about the Pittsburgh company’s new Low Cash Mode digital service. It signals account holders when their balances are about to go negative and gives them 24 hours to block transactions or add funds before fees are assessed.

Overdraft charges have been a public relations black eye for the industry for years, but banks have clung to them as an important source of noninterest income — especially in an era of low interest rates.

But competitive, regulatory and technological forces are driving change.

Federal regulators urged banks to waive overdraft charges at the start of the pandemic, which total up to $35 billion across the industry annually, according to some estimates noted in a Brookings Institution report in March.

Since banks began waiving some overdraft fees, talks have picked up around the industry to address how these penalties are charged, Demchak had said in November.

Other companies have made changes to ease the costs of overdrafts. Over a decade ago, the $123 billion-asset Huntington Bancshares in Columbus, Ohio, began giving a 24-hour grace period for customers to cover a negative balance before a fee was charged. More recently, Wells Fargo in September launched a checking account that has no minimum balance requirements and doesn't allow overdrafts; it resembled other consumer-friendy offerings from other megabanks and regional banks.

Smallers players are making similar moves, too. Citizens Bank of Edmond, a $300 million-asset company in Oklahoma, last year began offering a no-interest overdraft line that would be paid back when stimulus checks were deposited.

Some fintechs like Varo offer checking accounts without charges for overdrafts and other fees, touting how the practice distinguishes them from many traditional rivals.

Meanwhile, the Consumer Financial Protection Bureau is expected to make enforcement of overdraft practices a priority under new leadership, which may spur more banks to follow in PNC’s footsteps, said Aaron Klein, a senior fellow in economic studies at Brookings.

Still, traditional practices die hard.

Banks have been steadily raking in more fees from stimulus payments that came in at the end of last year, according to S&P Global data. There were an estimated $2.3 billion in overdraft fees charged in the fourth quarter, up 64% from the pandemic’s low in the second quarter but still 24% lower from the same period one year before, according to S&P Global.

A handful of smaller banks lean on overdraft revenue for more than half their net income, the Brookings report said.

PNC’s new service prompts account holders about upcoming payments that are about to send their balance into the negative and allows customers to prioritize or cancel transactions in order to avoid overdraft penalties or fees for nonsufficient funds.

The interface lets account holders know how different decisions they might make on upcoming payments would affect their balance, according to a virtual demonstration the bank gave Tuesday.

“For the first time, customers have in their control what payments are processed,” Karen Larrimer, head of retail banking and chief customer officer at PNC, said during a demo.

PNC expects to roll out the offer in the coming weeks to consumers, but it didn’t say when it will make them available to business customers. Executives said they are fine-tuning disclosures about the risk of being charged late fees by outside companies that are owed any payments the customer chooses to undo within the Low Cash Mode system.

PNC charged roughly $273 million in overdraft fees last year, according to the company’s call report, down from more than $412 million in 2019 as the bank eased penalties during the pandemic. A Low Cash Mode pilot program with about 20,000 customers helped the account holders lower the overdraft fees they were being charged by 60%, the bank said.

The service will lead to an estimated annual decline in overdraft charges of between $125 million and $150 million each year, which PNC says it has already built into its planning. The company’s full year 2021 revenue outlook due when earnings are reported on April 16 will not be affected by the change, PNC said.

The lost revenue would equal about 0.8% of PNC’s fourth-quarter annualized operating revenue and 1.9% of pretax operating income, analysts at Piper Sandler said in a note to clients Tuesday. However, the analysts added that the product would help PNC attract new customers and allow the bank to “get in front of any potential changes toward a more aggressive regulatory environment,” according to the note.

The time given to customers to cure an overdrawn account before fees are charged may prove to be the biggest benefit for customers who run short of cash just before payday, Klein at Brookings said.

“What you’re finding at PNC and some of the larger banks is a desire to get out of this space because it’s not in the long-term benefit of their customers,” Klein said. “This is indicative of a trend of the larger banks to decrease reliance on this fee for profit.”