Small Texas bank that relies heavily on overdrafts moves to curb fees

First National Bank Texas, which relies more heavily on overdraft fee revenue than the vast majority of U.S. banks, has taken a step toward curbing the controversial charges.

And while the $3.7 billion-asset company says that it’s mulling additional changes, it is facing criticism for not having already gone further.

Earlier this month, Killeen, Texas-based First National began offering customers a “one-day rewind” that allows for overdraft fees to be refunded so long as the account is not overdrawn by more than $12 at the end of the following banking day, according to a press release Tuesday.

The announcement came as large and midsize banks have been moving to overhaul their overdraft practices amid pressure from Biden-era regulators. Capital One Financial and Ally Financial have both eliminated the fees altogether, and Bank of America recently announced plans to reduce its overdraft fee from $35 to $10.

So far, there have been few signs that small banks are planning to move as quickly as their larger peers. But First National Bank Texas, which does business as First Convenience Bank, derives much more of its revenue from overdraft fees than most small banks.

During 2020, the Texas bank collected $100.2 million in overdraft-related fees, according to its latest full-year call report, which was down about 10% from 2019. Aaron Klein, a senior fellow at the Brookings Institution, found last year that the company’s overdraft fee total in 2020 was nearly three times greater than its profit, more than any other bank.

By comparison, overdraft fees equaled less than 10% of the profits reported by large banks like Bank of America and JPMorgan Chase.

First National’s announcement on Tuesday followed smaller steps that the bank, which is located northeast of Austin, has taken in recent years to limit overdraft fee revenue, according to a spokesperson.

First National had already limited the number of transactions that can incur an overdraft fee each day and month, and it had put caps on the size of purchases that can incur a fee, the spokesperson said.

The spokesperson also said that neither recent regulatory attention on overdraft fees nor more aggressive moves by bigger competitors influenced the bank’s decisions. First National is a federally chartered bank whose primary regulator is the Office of the Comptroller of the Currency.

“Our new One-Day Rewind service is the next step in the evolution of our consumer banking Overdraft Program,” the spokesperson said in an email, adding that the company “remains committed to innovating to meet the needs and improve the financial health of our customers and will continue to do so.”

In the first month of the one-day rewind program, about 26% of First National’s customers who had overdrawn their accounts took advantage, the company said in the press release.

Klein, of Brookings, said in an interview that First National’s most recent change is not enough to prove that it is willing to walk away from fees that have proven damaging to consumers.

“I believe this small and insufficient change is meant to provide cover against the more structural change that is needed,” he said. “I applaud the bank for making a baby step in the right direction but remain skeptical this bank is capable of being a profitable institution without relying on overdraft fees to survive.”

In December, acting Comptroller Michael Hsu said that overdraft programs worsen economic inequality and signaled regulators were ready to rein in the practice after years of pressure from consumer advocates. He identified eight specific overdraft-related practices, including providing a grace period before charging a fee, that he said promote consumer financial well-being.

“Overdraft programs are changing, and the outlook for meaningful reform is promising,” Hsu said at a conference hosted by the Consumer Federation of America.

Under the leadership of Director Rohit Chopra, the Consumer Financial Protection Bureau is also expected to take a tougher stance on banks that rely heavily on overdraft fees. While First National denied that increased regulatory attention is behind its changes, Klein said officials in Washington have made their intentions clear.

“Hsu’s comments are having ripple effects even among the bottom dwellers in the banking industry when it comes to overdrafts,” he said.