Overdraft Changes Establish a New Competitive Landscape

We’ve all seen the headlines about several large banks reducing or eliminating overdraft fees. 

But what the stories haven’t highlighted are the negative consequences that occur when overdraft fees are reduced or eliminated – or the opportunity this presents for credit unions.

Banks cutting their fees will make up revenue somewhere else. It won’t happen immediately, but these banks will increase monthly fees for checking accounts, or make it more difficult to have fees waived. And monthly fees can affect all account holders (who hate those fees), not the small minority of people who willingly pay overdraft fees. 

But what also inevitably will happen is that access to overdraft liquidity will be reduced for those who use and value the service.

Most of our clients offer a maximum consumer overdraft limit of $1,500. If you are running a bank and you just eliminated overdraft fees, are you really going to risk paying up to $1,500 in overdraft items per account when you will not be compensated for that risk/? Of course not.

Our prediction of increased monthly fees and reduced overdraft coverage isn’t just speculation. 

First, a 2021 Federal Reserve study found that overdraft price caps lead to “reducing banking services for low-income households,” as well as “constrain the supply of overdraft credit and reduce financial inclusion among lower income households.”

Second, Truist’s new “Truist One” account has no overdraft fees, but only covers a $100 “negative balance buffer”. If you want more, you have to apply for their line of credit which goes “up to $750” (and which almost certainly will have loan fees and interest). Plus, the new accounts “may include a monthly fee.”

People who regularly use overdraft won’t find a $100 limit very useful. This means that banks leaving consumers in the lurch for transactions they used to cover will open up a new competitive landscape for financial institutions that pay larger amounts of insufficient funds transactions into overdraft.

You can do this in a responsible way, by setting overdraft limits at the account level based on ability to repay. And, you can publish those limits to consumers, something none of the banks eliminating fees will do. 

This is the best way to answer what otherwise could be a difficult question about why Capital One doesn’t charge an overdraft fee but your institution is still charging $30 (for example). The answer is: “The reason we charge $30 while Capital One doesn’t is that we’ll actually cover you – we’ll actually pay your items. And we’ll clearly tell you what your overdraft limit is, which Capital One won’t do.”

We also strongly endorse offering small-dollar loans as an alternative to overdraft. Software can automate this process – both underwriting and documentation.

Be a true supporter of your members by actually paying items for those who want to use overdraft, and provide access to small-dollar loans for those who don’t but still have real liquidity needs. 

You can preserve both your revenue as well as your members’ access to vital funds.