Banks are feeling pressure from both politicians and competitors to adjust their overdraft practices.
At a recent congressional hearing, politicians laid into large bank CEOs over the amount of overdraft revenue their institutions collected throughout the COVID-19 pandemic. Neobanks — start-up companies that focus on digital-only offerings — such as Chime have achieved multibillion-dollar valuations and offer generous overdraft policies, such as allowing customers to overdraft up to $200 before charging a fee.
Just this week, bankers at an industry conference said they expect overdraft revenue to decline as they roll out more consumer-friendly products, including CEOs at some of the top banks by overdraft revenue.
"The gravy train on overdraft is coming to an end," said Aaron Klein, a senior fellow at Brookings Institution who has published research on overdraft policies. "Federal regulators for too long were asleep at the switch allowing an incremental fee to become the main business model for a couple of banks."
Overdraft fees account for a significant portion of revenue at Regions Bank, a subsidiary of Regions Financial Corp. In the first quarter, service charges on deposit accounts constituted 6.2% of the bank's operating revenue, compared to an industry median of 1.2%. But CEO John Turner said this week that is likely to change moving forward as the bank expects to unveil a new, no-overdraft product in the third quarter.
"We view [overdraft] as a source of fee income that will continue to decline over time. Our desire is to make more information available to customers so that they can better manage their finances," Turner said on June 15 at a conference. Turner also discussed moving away from overdraft revenue in January during the bank's 2020 year-end earnings call.
"When we saw the election outcome, it became clear that overdraft issues would be in the crosshairs of the Consumer Financial Protection Bureau," said Isaac Boltansky, a policy analyst for Compass Point Research and Trading. "At that point, it would be malpractice if banks and bank boards didn't talk about changing their overdraft policies."
Regions is far from the only bank rolling out products to cut down on overdrafts. Earlier in June, Ally Financial Inc.'s unit Ally Bank eliminated overdraft fees on all accounts, and made all customers eligible to avail the service without any requirements or restrictions. In April, Cullen/Frost Bankers Inc. announced that it would allow consumers a grace period for overdrafts of $100 or less before charging a fee, as long as the customers direct deposits at least $500 per month. Several other banks have made low-overdraft checking accounts a staple of their consumer offerings.
Huntington Bancshares Inc. implemented its "Fair Play" approach to checking accounts, which allows a 24-hour grace period to cover overdrafts, more than a decade ago. When the company acquired TCF Financial Corp. — a company so keen on overdraft revenue that its CEO named his boat the "Overdraft" — Huntington management said implementing its Fair Play policies would result in a net reduction of $15 million in revenue.
The PNC Financial Services Group Inc. recently introduced a "Low Cash Mode" digital offering on its virtual wallet, a tool intended to help consumers avoid overdrafts. The feature alerts customers if their account balance is low or reaches negative territory and allows customers 24 hours to remedy before incurring a fee. At a conference this week, CEO William Demchak said the tool was an example of the promise offered by real-time payments.
"One of the ways you can fix it, since we're suspending time, is you can just change your payments, just swipe left and right. Shut stuff on and off," Demchak said. "It's a remarkable thing, and I think we're entirely unique in having that capability at this point."
Not all banks have been cleared of their overdraft practices. Several banks have settled lawsuits or tussled with the CFPB over the last 12 months regarding overdraft practices. Bank of America Corp. in May agreed to pay $75 million to settle a lawsuit alleging it excessively charged overdraft fees. Bank of Hawaii Corp. issued refunds in January this year as part of a class action lawsuit settlement. And both Regions Financial and TD Bank have both disclosed in regulatory filings over the last year that they are facing CFPB investigations over their overdraft practices.
As banks move away from overdrafts, some policy analysts see a need for clarity on small-dollar lending, arguing that the need for short-term credit will not disappear. Regulators have a muddled history on banks offering short-term credit, discouraging products such as deposit advances in 2013 in guidance that was rescinded in 2017.
"If overdraft dies, does the industry have a means of saying, 'We need a cleaner rules of the world for small dollar lending and deposit advance products,'" Boltansky said.
