Sat. Jan 22nd, 2022

While U.S. shoppers are counting on the cost of their last-minute holiday purchases, there’s one thing they need to worry about a little less in 2022: overdrafts.

Consumer advocates said last year were the most important reversals and adjustments to how banks charge clients when their debit accounts fall below zero.

Those fees “are perhaps the single most unpopular thing banks do to their customers,” says Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, a consumer advocacy group. “I think you’re really seeing a tipping point this year.”

A number of US banks have made changes to their overdraft policies. Examples include PNC, the seventh-largest U.S. bank by assets, which lowered fees and gave customers a longer grace period to cover an overdraft, and Capital One, which said in December that it was eliminating overdraft fees altogether.

JPMorgan Chase, the largest U.S. bank, also announced changes to its overdraft policy last month, including giving customers a day to catch up on their payments, contributing to measures the bank has taken in previous years.

“We do customer research consistently throughout the year and we look at the competitive landscape,” Steve Goodman, head of consumer banking services at JPMorgan, told the Financial Times. “We put it all together to constantly develop our products and services, whether it’s overdrafts or other things.”

Bar graph of borrowers earning hundreds of millions of dollars each year from overdraft fees that US bank earnings from overdraft

Overdrafts became a focal point during a bank hearing in the U.S. Senate in May, when Elizabeth Warren, a leader of the progressive wing of the Democratic Party, wrestled with JPMorgan chief Jamie Dimon over the charges. Warren encouraged Dimon and his fellow bank chiefs to repay the fees to customers.

Warren’s exchange with Dimon – during which she named JPMorgan the “star of the over-the-top show” for how much it raised in fees – has once again drawn attention to the issue. Shortly after the exchange, Utah-based digital lender Ally Bank announced it would do away with overdrafts.

Rohit Chopra, the Bureau of Consumer Financial Protection new director, also took a muscular stance on the issue, including instructing the consumer watchdog to investigate banks that rely heavily on these fees.

Smaller banks that focus on consumer banking services typically receive a larger percentage of their revenue from overdraft fees compared to large banks with more diversified business lines.

“Rather than competing on transparent, upfront pricing, large financial institutions are still stuck on exploitative junk fees that can quickly drain a family’s bank account,” Chopra said in a statement last month.

There was also competitive pressure on banks of fintech challengers like Chime, who made overdraft accounts the cornerstone of their marketing campaigns. It has “become something in the minds of consumers that has made fintech better than banks”, Bill Demchak, chairman and CEO of PNC, told the FT.

U.S. banks earned an estimated $ 15.47bn from overdraft fees in 2019, a figure that has remained fairly stable from previous years, according to the most recent figures available from the CFPB.

Capital One, the largest U.S. retail bank to scrap the fees, estimated that its decision would cost him about $ 150 million annually, which was 0.5 percent of its total revenue for 2020.

The benefits of eliminating those fees can outweigh the loss. Banks and fintechs that have announced new overdraft policies are acquiring customers at twice the rate of financial institutions that do not, according to Curinos, a research firm that focuses on the financial services industry.

“Economically, it’s a good deal,” said Brendan Coughlin, head of consumer banking at Citizens Financial, which introduced more forgiving overdraft policies in October.

Since the changes to its policy last year, PNC customers have charged $ 500 million in purchases that put their accounts in overdraft and ultimately no fees.

“It’s not surprising that our customers’ complaints have dropped by more than half – and that should help through the holiday season,” Demchak said.

Although many of the largest U.S. retail banks have announced overdraft policies in recent years, most have not completely waived the fees. Proponents have argued there is a use case for the fees as a product and banks should be reimbursed for extending what is essentially an unsecured loan.

“The business rationale is that you are not in the business of making loans with no interest rates. Banks are supposed to earn a return on capital, ”says Betsy Graseck, global head of banking and diversified financial research at Morgan Stanley.

The issue, however, is to ensure that any fees are transparent and manageable for those charged, especially given that many account holders who go overdrawn are lower-income clients who have to be paid to pay checks, consumer advocates said .

Government pressure is essential to ensure that overdraft fees become less common and more transparent, says David Silberman, senior adviser at the Washington-based Center for Responsible Lending and a former acting deputy director for the CFPB.

“Leave after [its] own devices, ”said Silberman,“ I do not think we can accept that the market is going to change fundamentally. ”

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