US Retail Banks Experience Overdraft Fee Income Surge

In recent months, fourteen of the largest retail banks in the U.S. reported an uptick in revenue from overdraft fees and dishonored checks during the first nine months of the year. In contrast, two major banks saw significant drops in this income, as indicated by a Reuters analysis.

This data underscores a growing divide within the banking industry regarding these fees, especially as economic and regulatory changes lead more consumers to incur them. It also points to the fact that, despite industry promises to lower fees following political pressure during the Biden administration, some banks still heavily rely on overdraft revenue.

Reuters examined overdraft and “not sufficient funds” (NSF) fees from 20 large U.S. retail banks, which report such information to the Federal Financial Institutions Examination Council—a regulatory authority. These banks collectively hold about half of all insured bank deposits in the country.

Overall, the income from overdraft and NSF fees for this group has increased by 2%, totaling around $2.99 billion. It’s worth noting that much of this growth relates specifically to overdraft fees, as many banks have reduced NSF fees in recent years.

CFPB Regulation Repealed

The spike in fee income occurred after Congressional Republicans moved in May to overturn a Consumer Financial Protection Bureau (CFPB) rule instituted under the Biden administration aimed at curbing overdraft fees. This rule, which the CFPB estimated could save bank customers about $5 billion annually, was designed to cap overdraft fees at $5, down from the average of $35.

Before the CFPB’s interference, some banks were already making adjustments, influenced by political pressure, in an effort to eliminate or mitigate these fees for their customers. However, with Republicans controlling Congress now, banks seized the chance to repeal this rule, expressing concerns that such regulations could inhibit credit access for customers in need.

Aaron Klein, a Brookings Institution fellow who specializes in overdraft policy, suggested that economic factors often drive these changes. He mentioned that consumers are more prone to overdraft during challenging economic times. Yet, he speculated that if the CFPB’s regulations had remained intact, the situation could have been different, with banks better prepared to comply.

“It’s almost like, after oversight diminished, some banks returned to their previous practices while others maintained some improvements,” he observed.

A CFPB study from 2017 indicated that around 80% of overdraft fees stem from just 9% of accounts, which typically hold small balances. Lindsey Johnson, CEO of the Consumer Bankers Association, acknowledged that many consumers depend on overdraft services to navigate financial difficulties; the banking industry, she claimed, is striving to reduce these fees.

“Research shows consumers place a high value on overdraft services, so it’s crucial that these protections remain available,” she noted.

Income Below Historical Averages

USAA Federal Savings Bank reported the largest increase in overdraft fees, at 20%, amounting to $78 million and representing over 20% of the bank’s net income for the first three quarters of the year. They explained that overdraft services are designed to meet short-term needs and emphasized that their fees are competitive. However, they anticipate a decline in these fees next year after raising their minimum balance threshold for incurring fees from $50 to $100.

TD Bank and Citizens Bank experienced substantial increases as well, with TD seeing a 17% rise and representing 13% of their net income from these fees. In contrast, JP Morgan and Bank of America also reported slight increases of 8% and 2%, respectively.

On the downside, Wells Fargo reported a 10% decrease in fee income. Meanwhile, Trust Company faced a more significant drop of 22%. Both Citizens and Wells Fargo declined to comment, while JPMorgan and Trust did not respond to inquiries.

Notably, Citigroup and Ally Financial decided to eliminate overdraft fees in 2022 and 2021, respectively, while still offering overdraft services. Although there has been an overall increase in fees recently, they still fall significantly below historical standards. Estimates suggest that industry-wide overdraft fees could reach $6 billion in 2023, a marked decline from the $13 billion reported back in 2019.

“The current numbers are starkly different from what they were,” remarked Christopher McGratty, head of U.S. banking research at KBW. “It’s evident that consumer protections are having an effect.”