Three years after regulators tried to rein in the fees banks charge customers for overdrawing checking accounts, overdraft programs are still big business for many banks. That’s one of the key points in a new study by the Consumer Financial Protection Bureau.
In 2010, the Federal Reserve said banks could no longer automatically enroll customers in overdraft programs; instead, consumers must opt in. More than a year ago, the CFPB said it would study overdrafts to see if the new rules sufficiently protect consumers. The newly released study largely confirms what we’ve reported before: Overdrafts still befuddle some consumers and continue to provide a big source of bank revenue. The study does, though, provide a few interesting nuggets about the business of overdrafts:
• Many banks—especially small ones—depend on overdraft fees. They make up 27.5 percent of community banks’ net income after taxes.
• Overdraft programs are profitable. The study doesn’t say how much profit banks make. But it does report that banks spend just 14.4 percent of the fees they collect on the most costly part of the program, which comes when a customer overdraws his account but doesn’t have money to later pay off the amount he owes. When banks can’t collect that unpaid balance, they write off the debt.
• A lot of people overdraw their accounts, but some people do it a lot. In 2011, more than one in four customers overdrew their accounts, according to the study. But the revenue from these programs is driven by what could be called overdraft whales: the almost 8 percent of customers who overdraw at least 10 times a year. These heavy overdrafters account for 84 percent of all overdraft fees and are more likely to have their checking accounts eventually closed because they just don’t have enough money. For heavy overdrafters who didn’t sign up for the overdraft program, the opt-in rule saved them big time—over $450 per account in the second half of 2010 after the regulation went into effect.
• Banks are convincing new customers to sign up for overdraft programs. While just over 16 percent of all customers have opted in to the programs, more than 22 percent of new customers signed on. And heavy overdrafters are four times as likely to opt-in, too.
In a call with reporters, the CFPB said that it is considering taking further action on overdrafts, and the study pointed to some ways in which the agency might increase oversight. For example, the reports spends a lot of time looking how banks process a customer’s checks and debit purchases. Some deduct them in chronological order, while others reorder the payments and process the largest first, which can result in having to pay more fees on each subsequent smaller transaction. It’s not hard to imagine the CFPB setting standards for this. It also says there are big variations on how much banks let consumers overdraw—that, too, seems like a potential target for new regs. The CFPB says it doesn’t think overdrafts should disappear entirely—but if I were running a small bank that relied heavily on overdraft fees, I’d be nervous.