Banks change overdraft policies amid competition, regulatory pressure

Pressure from regulators and lawmakers, as well as a need to stay competitive, has pushed many banks to make changes to their overdraft practices in the past year.

In June, the Consumer Financial Protection Bureau said it is examining overdraft fee practices at more than 20 unnamed banks to identify companies for "further examination and review." The agency launched an initiative this year that seeks to reduce what it called "exploitative junk fees" charged by banks and financial companies.

The New York State Department of Financial Services, in guidance released July 12, urged lenders in the state to limit overdraft fees on consumer accounts.

Eliminating, reducing overdraft charges

Since June 2021, at least 31 banks have announced the elimination of overdraft charges, reduced fee amounts or relaxed rules related to them.

Among the first were Ally Financial Inc., which eliminated charges for existing accounts, and JPMorgan Chase & Co., which eliminated charges for new accounts and relaxed fees to allow an "overdraft cushion" of $50 instead of $5 in existing accounts.

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More banks plan to follow suit, with BOK Financial Corp. set to announce changes in the third or fourth quarter, and Simmons First National Corp. expecting to announce changes by year-end.

"We're taking a look at all the elements of our deposit account pricing, including overdrafts, [nonsufficient funds fees], those kinds of things," Simmons First Chairman and CEO George Makris Jr. said during an earnings call. "And what we're going to end up with is something that's very justifiable from a cost perspective and a benefit to the consumer."

Resulting fee income impacts

Income from overdraft fees was down in the second quarter of 2022 from the year-ago quarter at some of the banks that have made overdraft announcements, but up year over year at others.

At Bank of America Corp., overdraft fee income declined 65.9% in the second quarter from the same quarter a year ago. From 2021 fee income, it is estimated to drop 75%. At JPMorgan Chase, overdraft fee income grew nearly 10.6% quarter over quarter.

Wells Fargo & Co.'s elimination of overdraft fees took effect at the end of the first quarter. Income from the fees declined 0.3% quarter over quarter, to roughly $331 million from about $384 million in the first quarter. Company executives have said the bank will face a roughly $700 million annual impact from eliminating the fees.

Citigroup Inc. was expected to eliminate fees this summer. Its overdraft fee income grew more than 13.6% quarter over quarter.

For most banks that have made announcements, estimated impacts are unavailable.

Congressional activity

Beyond federal and state regulators, Congress might intervene on overdraft requirements.

Rep. Carolyn B. Maloney, D-N.Y., sponsored a bill intended to introduce new limits on banks' overdraft practices through a monthly cap on the number of times such fees could be charged and provide customers an option to opt in or out of banks' overdraft programs.

Sen. Cory Booker, D-N.J., and Sen. Elizabeth Warren, D-Mass., reintroduced legislation in August 2021 to ban overdraft fees on ATM withdrawals and debit card transactions. In May, Warren, Booker and Maloney wrote letters to large banks asking about their overdraft policies. They have not disclosed whether they received responses from the banks.