US banks' overdraft fee income dropped again in the first quarter as regulators upped the ante.
The industry reported an 8.9% drop in overdraft-related income in the first quarter, continuing the downward trend seen throughout all of 2022. However, the latest quarter-over-quarter decline was a smaller drop than last quarter when overdraft fee income fell 13.3%, according to S&P Global Market Intelligence data.
Regulatory and competitive pressures have culminated since the end of 2021, pushing many banks to move away from legacy overdraft practices. In the latest move from regulators, the Office of the Comptroller of the Currency (OCC) issued guidance warning banks that some overdraft fee practices are risky and can potentially violate consumer protection law. With the April 26 bulletin, the OCC joined the Consumer Financial Protection Bureau's and the White House's crackdown on "junk fees," including bank overdraft fees.
Consumer deposit fee trends
The industry reported $1.40 billion in overdraft-related service charges in the first quarter, down from $1.53 billion in the linked quarter. The first-quarter total represented a 34.1% drop from the year-ago quarter.
As overdraft fee income continued to drop, total deposit fees also declined. Service charges and fees on consumer deposits totaled $2.88 billion in the first quarter, making up 1.10% of US banks' operating revenue. That is down from $3.00 billion and 1.25% in the fourth quarter of 2022 and $3.57 billion and 1.66% in the year-ago period.
Declines in overdraft-related fee income largely made up those declines since maintenance and ATM fees have remained fairly steady.
Highest proportion of deposit fee income
The industry median for service charges and fees on consumer deposits as a proportion of operating revenue held relatively steady in the first quarter at 1.3%, down slightly from 1.4% in the fourth quarter of 2022. However, some banks depend on that fee income more than others and could soon feel a squeeze on their revenue following the new guidance from the OCC.
Community banks are expected to be impacted more than larger banks, BTIG analyst Isaac Boltansky wrote in an April 29 note. Of the top 20 banks with the highest proportion of consumer deposit fees, all but two had assets below $10 billion.
"It is important to note that the nation's largest banks have been steadily moving away from overdraft fees and our sense is that there is a cohort of smaller banks that have an overreliance on these types of fees that will face the greatest ramp in regulatory risk," he wrote.
Service charges on consumer deposit accounts made up more than 10% of four US banks' operating revenue in the first quarter, down from eight banks in the fourth quarter of 2022 and five banks in both the second and third quarters of 2022. The fourth-quarter 2022 uptick was due to some banks only reporting this data once a year in December.
Woodforest National Bank reclaimed its spot as the US bank with the highest proportion of consumer deposit fees to operating revenue, after falling behind First National Bank Texas in the fourth quarter of 2022. Woodforest reported total service charges of $200.3 million for the 12 months ended March 31, or 24.3% of its operating revenue.
Most deposit fee income
JPMorgan Chase & Co. maintained first place among banks with the most consumer deposit fees. The bank reported $2.34 billion in these fees for the 12 months ended March 31, a figure identical to the $2.34 billion it had in the 12 months ended Dec. 31, 2022, but up 7.5% year over year. The growth came despite announcing changes to its overdraft policies in December 2021.
However, the second and third banks on the list reported significant drops in this income year over year.
Wells Fargo & Co., which took second place with $1.99 billion in consumer deposit fees for the 12 months ended March 31, reported a drop of 13.2% year over year, while Bank of America Corp., which ranked third among banks with the most consumer deposit fee income in the first quarter with $1.56 billion, posted a year-over-year decline of 36.2%.
