Overdraft fees plummeted 49% in a single quarter as economic shutdowns due to the COVID-19 pandemic sapped consumer spending.
Maintenance charges and ATM fees also declined by double digits on a linked-quarter basis, making for a steep decline in service charges and fees. All told, the banking industry booked $2.60 billion in service charges, a $1.58 billion decline from the previous quarter and an even larger drop from the year-ago period.
Banks pointed to government relief efforts, which included stimulus payments, and reduced economic activity as the main drivers for the decline in overdrafts and other service charges. Many banks also announced waivers of service charges to help customers handle the pandemic-induced recession. First Interstate BancSystem Inc. President and CEO Kevin Riley highlighted a unique cause during the bank's earnings call: casinos. He said communities with gambling establishments have reported essentially zero overdrafts, which could be attributed to the closing of casinos.
"I think what happens as some of these things open up, people go back to their normal spending habits, and some of those fees would start coming back," Riley said, according to a transcript. "But they pretty much said they had no overdrafts in the whole market due [to] the fact that all the casinos were shut down."
Analysts and bankers say they expect service charges to rebound in the third quarter as parts of the economy re-open and banks start to sunset fee waivers. At the same time, the fee line item is expected to stay below long-term trends. Especially as the number of COVID-19 cases has started to rise again in some locales, service charges should be down year over year through the rest of the year, said Peter Winter, an analyst for Wedbush Securities.
"In general, I think deposit service charge fees are going to improve but stay depressed," Winter said in an interview. "You're seeing states slow down the re-openings, so that also is contributing. Our view is that service charges on deposit will stay weak throughout this year but should improve from the second quarter."
Overdraft fees have also been a hot-button issue for regulators and policymakers. The Center for Responsible Lending in June called on Congress to prohibit the collection of overdraft fees throughout the COVID-19 pandemic, arguing that the impact of the fees is more severe as depositors lose jobs. The Consumer Financial Protection Bureau on Aug. 20 levied a $25 million civil money penalty on TD Bank NA over the bank's marketing and sale of overdrafts. The consent order, which alleged the bank failed to obtain affirmative consent from customers, also called for $97 million in restitution.
TD Bank reported the highest concentration of service charges as a portion of revenue among banks with at least $50 billion in total assets, booking $779.7 million in service charges, or 9.3% of operating revenue, over the last 12 months. Some smaller banks derive even more of their revenue from service charges. Most notably, Woodforest National Bank derived 31.9% of its operating revenue from service charges, the only double-digit concentration among the top 20 banks by deposit fees collected over the last year.
"COVID aside, service charges is a flat-at-best revenue source for the banks," said Christopher McGratty, an analyst for Keefe Bruyette & Woods. "There's been a ton of regulation that has hit the industry over the past 10 years that has made it more challenging for the banks to recognize revenues and better for the consumer. Looking over the next couple years, keeping service charges flat is, I think, a win, but I think we're going to be off a little ways."
Christopher Marinac, an analyst for Janney Montgomery Scott, also noted that usage of digital banking, which has increased during the pandemic, could suppress overdraft fees. He also said the recession could continue to dampen service charges as consumers tighten their spending habits. On the other hand, tougher economic times could force consumers to overdraft more frequently, Marinac said. Historical trends are difficult to discern since banks began reporting overdraft fee data in 2015.
"Behaviors are changing. We know that customers are perhaps banking differently," Marinac said. "Maybe there's more awareness of those fees and that it's still going to be less even with the shutdown behind us."