Pressure to cut overdraft fees has smaller banks changing up their overdraft policies

Article by Jenna McNamee | Jun 22, 2023

The news: Pressure from regulators and increased competition have pushed banks of all sizes to make drastic changes to their overdraft fees. But those cuts and reductions have impacted their balance sheets, especially for community and regional banks. Here’s how some banks are updating their overdraft policies to keep the revenue coming in, per The Financial Brand.

How we got here: The Consumer Financial Protection Bureau (CFPB) forced banks to reevaluate their overdraft fee policies last year when it said it would take a closer look at how banks are assessing the fees.

Describing the overdraft process as “often exploitative,” the CFPB said it would evaluate the length of banks’ grace periods, the thresholds above which fees are assessed, and their caps on the number of fees charged.
The warning prompted both small and large banks to make some changes. KeyBank reduced its overdraft fees and eliminated its non-sufficient funds fees. Citigroup, Capital One, and Ally completely eliminated their overdraft fees. And Wells Fargo, JPMorgan, and Bank of America reduced the risk of customers incurring overdraft fees.

New overdraft policies: Though the changes affect all banks’ bottom lines, the fee reductions have hit smaller banks harder. But some banks have found creative ways to restructure their overdraft policies that don’t entirely eat away at profits.

New York-based Jovia Financial Credit Union lets members choose the type of checking account that suits their needs. Its CareFree Checking account doesn’t assess overdraft or NSF fees, and no minimum balance requirement. Its Go Green checking account assesses overdraft and NSF fees, but it pays 1% on balances up to $25,000.
Some banks, like Iowa-based MidWestOne Bank, implement a tiered fee schedule. For example, at MidWestOne customers aren’t charged a fee for an overdraft of $5 or less, and customers have options to avoid fees on overdrafts of $50 or less.
Other overdraft policies include only looking at account balances at the end of the day or implementing an “overdraft credit” that generates interchange fees instead of overdraft fees. Banks with advanced tech capabilities can consider offering short-term loans. These loans can be highly profitable, but back-end operations like underwriting must be efficient and low-cost.

The bottom line: Overdraft services are an important feature for many consumers—35% of Americans who’ve overdrafted their accounts more than 10 times said their most recent overdraft was intentional, according to the Financial Health Network.

The ability to overdraft keeps consumers in the banking system and prevents them from turning to expensive alternatives like payday loans. But consumers that use overdraft services at community banks will likely discover that these services are cheaper at larger banks or digital challengers. Small banks looking to retain their client base should consider trying out new overdraft policies to maintain—or perhaps even improve—customer satisfaction.