Overdraft reforms expected to cost larger banks $4 billion a year

Customers of large and regional banks are set to save more than $4 billion a year as a result of recent overdraft-related changes, according to a new analysis from The Pew Charitable Trusts.

The savings represent roughly 26% of the overdraft fees that all banks charged in the last year before the COVID-19 pandemic, indicating that the industry is taking a substantial revenue hit from the reforms.

The Pew analysis focused on consumer savings at just the 25 largest U.S. banks. The industry as a whole, including credit unions, collected an estimated $15.5 billion in overdraft-related fees in 2019, though the total dipped during the pandemic as some banks offered more ways to avoid the charges.

“This is a major step in the right direction,” said Alex Horowitz, principal officer at Pew’s Consumer Finance Project, in reference to the report’s findings. Black and Hispanic customers will get bigger savings, since they are more likely to incur overdraft fees, he said.

Pew’s findings suggest that Biden-era regulatory pressure and competition from lower-cost online competitors have taken a big bite out of a sizable source of banks’ fee revenue. Top officials at the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency have been encouraging banks to make reforms, even as a Democratic bill to rein in overdraft fees has stalled in Congress.

Three relatively large banks — Ally Financial, Capital One and Citigroup — have eliminated overdraft fees entirely, while various other banks have taken steps to help customers avoid overdrafts or lowered their fees.

Examples of such actions include: increasing the dollar threshold that triggers an overdraft charge, instituting a grace period before such fees are charged, eliminating nonsufficient fund fees that apply when consumers’ purchases are declined, and giving customers early access to their direct deposits.

The changes have dramatic revenue implications for banks, according to a new report from Mercator Advisory Group, which described the decline as gradual but ongoing.

“These changes are underway, but the industry’s path to lower fees and fee revenues will be a long one,” Sarah Grotta, a consultant at Mercator who authored the report, said in a press release Thursday.

Top executives at large banks have described the revenue declines as manageable and said the overdraft changes will lead to improvements in their customers’ financial health.

“While we expect to realize a reduction in fee revenue,” PNC Financial Services Group CEO William Demchak said in a press release announcing overdraft-related changes last year, “we firmly believe that this innovative and differentiated approach will drive significant growth in new and existing customer relationships over time as we execute our national expansion strategy.”

Pittsburgh-based PNC has since indicated that its overdraft revenues could fall by about 50% or more as a result of the changes, as have Minneapolis-based U.S. Bancorp and Charlotte, North Carolina-based Truist Financial.

But more than $2 billion of the savings to U.S. consumers will accrue to customers of the three biggest banks by number of branches, according to the Pew report.

Those banks — JPMorgan Chase, Bank of America and Wells Fargo — have received requests from state officials to scrap overdraft fees entirely, while also feeling pressure from the CFPB in its ongoing review of overdraft practices.

In January, Bank of America announced that it would slash its overdraft fee from $35 to $10. 

Three months later, BofA CEO Brian Moynihan told analysts that he expects the bank will record a $750 million decrease in its annual revenues as a result of its overdraft changes. That decline is more than than 65% of the nearly $1.14 billion in overdraft-related fees BofA charged in 2021, according to the bank’s call report data.

Wells Fargo expects a $700 million annual decline in fees as a result of its changes, Chief Financial Officer Mike Santomassimo said in the bank’s April earnings call. That total is about half of the bank’s $1.4 billion in overdraft revenues in 2021, its call report shows.

Executives at JPMorgan Chase, which charged about $1.2 billion in overdraft-related fees last year, have not shared similar projections in recent public appearances.

While the projected declines are meaningful, banks making customer-friendly changes may also benefit from retaining customers, said Pew’s Horowitz, who added that the banks may also see some operational savings from handling fewer complaints.

Some bankers have pointed to those benefits in public remarks about their overdraft changes. 

Providence, Rhode Island-based Citizens Financial Group, for example, said in January that calls to its customer service center fell by more than 40% in the weeks after the bank launched its new Peace of Mind overdraft policy.

Other banks that were part of the Pew analysis include North Carolina-based First Citizens Bancshares, which has announced plans to cut its overdraft fee to $10, as well as Buffalo, New York-based M&T Bank and Columbus, Ohio-based Huntington Bancshares, both of which have committed to lowering theirs to $15.

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