Citizens joins overdraft rollback with grace period feature, no-fee checking

The news: Citizens announced that it’s taking steps to help customers avoid overdraft fees:

• The bank’s grace period feature, called Citizens Peace of Mind, deployed on October 1, 2021, lets customers get their overdraft charges automatically rolled back by the end of the next business day if they use transfers or deposits to bring their accounts up to positive available balances.
• A no-overdraft-fee checking account will be available to customers in Q1 2022, and it will comply with Bank On National Account standards.

Trendspotting: Citizens’ anti-overdraft offerings are the latest example of a backlash in the US against the charges, which is following two different paths:

• Market: A growing number of banking players are offering ways for customers to avoid overdrafts, primarily through liquidity management tools. These players include neobanks like Chime, along with incumbents such as Bank of America, Fifth Third, and PNC. Meanwhile, digital-only bank Ally has gone further by dropping overdraft fees entirely.
• Legislative: A new state law in New York requires banks that maintain checking accounts to pay checks in their order of receipt. Deposits with bounced checks due to insufficient funds will also have the right to have smaller checks honored if balances are enough to cover them. Additionally, a new California state law will restrict overdraft fees by limiting where state public assistance funds can be deposited, per American Banker.

The big takeaway: Citizens’ actions against overdraft fees could help it garner good will among its customers and prospects. But the bank will need to replace any revenue it forgoes through these measures.

The bank is relatively dependent on overdraft fees, per a 2020 report from the Center Responsible for Lending.

• The report shows that Citizens, as of 2019, relied on overdraft and nonsufficient funds (NSF) fees at a proportion equating to 12.2% of its noninterest income (NII).
• In contrast, the proportion for JPMorgan Chase is just 4.4%, while Bank of America and Wells Fargo are both only at 6.7%.

Citizens could offset lower revenue in the overdraft/NSF category by charging for its new checking account—Regions Bank is taking this approach—or it could just take the hit and seek new revenue elsewhere.