Purse Ho
The growing focus on consumer financial health is pushing banks and regulators to change overdraft practices and rethink long-standing business models.
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Beginning last year and gaining momentum in January, a dozen of the nation’s largest banks began taking steps to limit NSF checks and courtesy overdraft fees, in which they allow customers to spend more than they have in their checking account and to charge them a fee for the privilege.
Overdraft has long been a controversial offering, at least since overdraft revenues began to grow rapidly in the 1990s due to rising fee amounts and the growth of debit card transactions. Since then, consumer advocates have been calling for an end to overdraft fees, calling the practice predatory lending disguised as a service for cash-strapped consumers.
What’s remarkable about the latest changes is why they were made. Some banks and policymakers see the problem as a consumer financial health issue. Ultimately, a reduced reliance on overdraft revenue better aligns banks’ interests with those of their customers, creating new opportunities for banks to offer solutions that address the consumer challenges that create the need for overdraft first. place.
PNC Bank caught the eye last April when it announced a new checking account feature called Low Cash Mode which allows customers to decide whether the bank should pay for items when their account balance is low and gives them more time to add funds to their accounts before bank charges. charge them overdraft fees. The bank also capped overdraft fees at one per day and stopped charging insufficient funds (NSF) fees. In announcing these changes, PNC said they would “better align with a fundamental principle of supporting the financial well-being of our customers.”
It turns out that PNC’s decision was the start of something that felt like a stampede. Beginning in December and over a few weeks in January, most major banks, including JP Morgan Chase, Wells Fargo, US Bank, Regions and Truist, joined PNC in eliminating NSF fees. Chase also joined PNC in offering customers an extra day to make a deposit to cover an overdraft and announced that it will not charge overdraft fees if a negative balance is less than $50 and on certain debit card transactions. .
Most significant of all are the changes announced by Bank of America and Capital One. In January, Bank of America – which a decade ago was the only one to choose not to charge overdraft fees on debit card transactions – announced not only that it would stop charging NSF fees , but that it would also reduce its overdraft fee from $35 to $10. And Capital One announced that it would stop charging overdraft and NSF fees, while allowing customers to opt for overdraft free of charge. In announcing the change, Capital One said “overdraft can be an important safety net for families” and that offering some free coverage would bring “humanity to the bank”.
The last time banks made major changes to their overdraft practices, they did so largely reluctantly as a result of legal or regulatory action. The most dramatic changes we are currently seeing are due to the confluence of a wider range of factors and trends.
The biggest game-changer has been the pandemic and the exposure of Americans’ financial fragility, in stark contrast to the latest earnings reports from the biggest banks. In addition, racial reckoning has laid bare inequalities in financial practices like overdraft. According to research from my organization, black and Latino households with checking accounts are 1.9 times and 1.4 times more likely, respectively, to report an overdraft than white households.
Meanwhile, innovation by fintech companies to provide cheaper forms of liquidity has reduced bank overdraft. Companies like Brigit and Dave offer cash flow-based products marketed as ways to avoid bank overdrafts, while neobanks like Chime offer overdraft transaction accounts at no cost. Meanwhile, more than 100 traditional banks and credit unions have introduced no-overdraft checking accounts, often as a nod to consumer groups, and have found adoption to be higher than expected.
The heightened attention from financial regulators has also been significant. In recent months, new CFPB and OCC leaders have published research, delivered speeches and testified before Congress about their overdraft concerns, raising the specter of a regulatory crackdown on the horizon.
What is noteworthy, besides the sheer number of the top 25 banks announcing changes in their practices, is their focus on overdraft fees rather than the overdraft itself. As Acting Comptroller Michael Hsu said in a speech last December, “the easiest way to eliminate overdraft fees would be to eliminate overdrafts.”
Banks and credit unions earned $15.5 billion on overdraft and NSF fees in 2019, according to recent CFPB research, so simply removing overdraft all at once would present financial challenges for many small businesses. institutions. But even if money were no object, ending overdraft as we know it without considering the underlying cash flow issues driving it could leave consumers just as financially struggling.
As Hsu went on to say, “While [eliminating overdraft] prevents harm, it can also limit financial capacity. For those who live paycheck to paycheck, the flexibility offered by no-fee or no-fee overdrafts can allow them to pay their bills on time, avoid costly alternatives, and improve their credit profile. . Therefore, our goal should be to improve people’s financial health, that is, their ability to spend, save and borrow so that they are empowered rather than hindered. Reforming bank overdraft programs promises to achieve this goal.
Some banks seem to recognize this based on the various approaches they take to overdraft reform. Bank of America and US Bank have developed small loans as an alternative to overdraft to help customers deal with cash flow problems, Huntington Bank has launched a line of credit and three other banks say they are developing similar products. Meanwhile, by providing grace periods and increasing the amount a customer can go negative before an overdraft fee is assessed, banks recognize that in many cases consumers are not choosing overdraft, but are instead victims of accidental delays due to a payment system. which does not work in real time.
Taken together, the changes made to overdrafts by the big banks are an important step in the right direction. The retail banking business model is such that banks often win when their customers lose. Reducing reliance on overdrafts – both by banks and their customers – creates the opportunity for banks to offer a wider range of automated tools and coaching to support savings. urgency, goal setting and improving credit ratings and becoming true providers of financial health.
Winning only when your customers win is what a strategy designed around financial health looks like. The latest announcements from banks and the regulatory focus on financial health represent promising progress.