-
Overdraft revenue at banks and credit unions is rebounding a bit after a sharp decline that began in 2008, newly released data shows.
December 14 -
Amex's Bluebird card account, exempt from Durbin and assertedly from bank regulation, is likely to generate high interchange. Consumers, banks and Amex won't pay for these checking accounts. Merchants (excepting Walmart) will.
October 22 -
Does overdraft protection have to be an all-or-nothing proposition?
March 10
Many bankers have told me recently they are not going to devote energy to improving their overdraft programs because overdraft is eventually going away. That could not be further from the truth.
While we are invested in the future of overdraft since our business provides overdraft management solutions, we also provide other fee income strategies and continue to see overdraft as the main driver of fee income.
Some bankers say, even though overdraft is the largest source of fee income on checking accounts, it's not worth investing in improving their overdraft programs because the Consumer Financial Protection Bureau could institute a cap on the number of overdraft fees a financial institution can charge or could ban overdraft programs altogether. This is just not going to happen.
First, instituting a cap on the fees banks may charge or their ability to offer overdraft services in general should require legislative action. If the CFPB were to take such an action without underlying legislation, you can be assured that there will be litigation over its power to do so. Even after Rep. Carolyn Maloney, D-N.Y., submitted a bill in 2009 and again in 2012 to institute a cap of six overdraft fees per year, the House refused to act on this issue, showing a lack of legislative appetite to undercut banks' primary fee income source on checking accounts.
Second, think about the implications of such an action for low-income consumers. Overdraft opponents argue the service disproportionately affects the poor, but our firm's recent
Currently, the overdraft income generated by higher-income heavy users of the overdraft service subsidizes free checking accounts for low-income consumers. Capping the overdraft income paid by high income accounts means banks would raise monthly fees on checking accounts, driving even more low-income consumers who cannot afford the higher fees to the realm of the unbanked. (In fact,
Third, consider the practicalities. The three common ways consumers can overdraw an account are: (1) by using a debit card; (2) at the ATM or (3) by writing a check. The Federal Reserve addressed the first and second ways with changes to Regulation E that took effect in 2010 requiring a consumer's opt-in before the institution can charge an overdraft fee.
As for checks, the Federal Deposit Insurance Corp. recently published
And finally, let's just say that the government caps overdraft income or prohibits overdrafts on debit cards altogether. What's going to happen? Well, several things – all of which point to the need to correctly manage overdrafts.
If the overdraft service can't be provided on debit cards any longer, then consumers will start writing more checks because this allows them to complete their desired purchase. When monthly fees on checking accounts escalate because of the lower overall overdraft income, where do you think consumers who traditionally have used overdraft services will be willing to pay those higher monthly fees? Naturally, at institutions that pay their checks into overdraft instead of returning them.
Market forces will reward those institutions that best serve consumers. If ABC Bank has a market reputation for covering items that overdraw the account, it might be able to charge a $25 monthly fee to have its checking account, while XYZ Bank down the street that never honors overdraft items might only be able to get a $5 monthly fee for its checking account.
The fact is, consumers will find a way to reward institutions that provide the best service to them.
However, let's try to avoid any of this happening by running overdraft programs more responsibly. For example, don't let low-income consumers dig themselves into a hole created by dozens of overdraft fees on top of the overdrawn balance by giving them the same overdraft limit as a person who deposits tens of thousands of dollars on a regular basis. And, when deposit patterns change, change the limit accordingly.
This follows the
Overdraft is not going anywhere – it is a service that some consumers highly value, and managing overdraft programs correctly will serve accountholders best while also moderating the regulatory and legislative reasons for trying to regulate it out of existence.
Christopher Leonard is president of Wilmington, N.C.-based