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Overdraft/NSF fee cuts save consumers $6B, banks lose revenue

Puerto Rico banks have taken steps to reduce or eliminate the fees.

Bank overdraft/non-sufficient fund (NSF) fees dropped 51% in 2023 compared to pre-pandemic levels, saving consumers more than $6 billion, according to the Consumer Financial Protection Bureau.

The 2023 reduction reflects annual decreases of nearly $2 billion in NSF fees and about $4 billion in overdraft fees.

Combined bank overdraft/NSF fee revenue for 2023 totaled $5.8 billion, down $6.1 billion from $11.9 billion in 2019, and 24% less than the $7.6 billion reported in 2022.

After five consecutive quarterly declines in overdraft/NSF revenue, most banks are no longer significantly reducing fees nor are they increasing other checking account fees to compensate for lost overdraft/NSF revenue, the CFPB stated.

Banks impose overdraft fees or NFS charges on customers who issue checks or make debit card purchases or ATM withdrawals that exceed the balance available in their accounts. If a customer has opted for overdraft protection, the transactions go through, and a fee is charged; otherwise, the transaction is blocked.

According to the CFPB, overdraft/NSF fees are typically about $35. According to Bankrate, the average overdraft fee in the U.S. is $26.61, while the average NSF fee is $19.94.

Regulators and consumer advocates have long criticized these fees, arguing that banks profit from their most financially vulnerable customers by imposing them.

New overdraft/NSF rules proposed
In January, the CFPB proposed a new rule that could reduce overdraft fees to as low as $3. The rule would prohibit financial institutions from charging fees for transactions that are declined instantaneously or near-instantaneously.

Under the proposed rule, financial institutions with assets of more than $10 billion could only charge customers what it costs to break even on providing overdraft services. This would require financial institutions to show the costs of their overdraft services to the CFPB, something few banks would want to do.

As an alternative, financial institutions could adopt a benchmark fee that would apply across all affected financial institutions. The CFPB proposed $3, $6, $7 and $14 as potential benchmarks. Banks could also offer small lines of credit to allow customers to overdraft, a service that would operate similarly to a credit card.

“For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines,” President Joe Biden stated on Jan. 17. “Banks call it a service — I call it exploitation.”

Bankers oppose
On the same day, the American Bankers Association released a statement opposing the CFPB’s proposal. The group cautioned that because of the new rule, banks may stop offering overdraft services, depriving  consumers of an important service.

“Survey data and consumer use demonstrate that overdraft provides an important form of short-term liquidity to consumers, ensuring that important payments such as rent, mortgages, car loans and utilities, are made on time and that consumers avoid utility shut-off or eviction,” the ABA said.

“For example, 88% of consumers find their bank’s overdraft protection valuable, and 77% who paid an overdraft fee were glad their bank covered their payment, rather than returning or declining it. When banks pay the overdraft rather than return an item, consumers also avoid the fee imposed by the payment recipient,” the ABA added.

According to the group, the Federal Reserve’s 2009 “opt-in” rule ensures that consumers have the information necessary to make informed and deliberate choices regarding overdraft fees. Consumers must “opt in” before banks may charge fees for overdrafts resulting from one-time debit card and ATM transactions, and they may opt out at any time.

“In the years following the 2009 rule, banks have provided an increasing number of ways for customers to limit or avoid overdraft fees,” ABA said. “These include sending low-balance alerts, linking the customer’s checking account to another account, imposing minimal thresholds and caps on total fees that the bank may charge per day, and providing overdraft grace periods during which a customer can make a deposit and avoid a fee.”

If the proposal is finalized, banks will likely reduce their overdraft fee to the CFPB’s benchmark fee, rather than assume the compliance risks and costs associated with calculating the bank’s breakeven fee, conducting an ability-to-pay determination or losing the ability to offset incoming credits to the customer’s account to repay the overdrawn amount, the group explained.

As a result, “banks may not offer overdraft services at all, depriving consumers of an important form of liquidity and leading them to turn to nonbank providers,” the ABA warned, noting that a 2021 New York Federal Reserve Bank study found that overdraft fee caps hamper, rather than foster, financial inclusion by limiting access to deposit accounts.

The ABA also pointed out that smaller banks will face competitive pressure to conform to the new rule, and those that cannot sustainably offer overdraft services at the benchmark fee may exit the market.

The Puerto Rico Bankers Association declined to comment on the matter.

Impact of bank revenue
Banks with assets of more than $1 billion have been required to report overdraft/NSF fee revenue in their call report data since 2015. For each of the five years from 2015 to 2019, the overdraft/NSF revenue reported by these banks totaled $11 billion to $12 billion a year, according to CFPB data.

Fees decreased during and after the COVID-19 pandemic partly because of pandemic-related stimulus checks raising average checking account balances and sustained reductions in the fees.

Large banks such as J.P. Morgan, Wells Fargo and Bank of America have recorded decreases in overdraft/NSF revenue of more than 40% compared to 2019, the CFPB reported.

Bank of America experienced the most significant decline at 91%, which likely reflects the reduction of its overdraft fee to $10, the elimination of overdraft fees on ATM withdrawals, and the elimination of NSF fees, among other changes.

TD Bank, Truist, U.S. Bank, and PNC all experienced declines of more than 50%. These four banks eliminated NSF fees. TD Bank, U.S. Bank and PNC established a grace period until the end of the next day before an overdraft fee is charged. TD Bank and U.S. Bank implemented $50 negative balance cushions, and PNC implemented a limit of one overdraft fee per day, according to CFPB’s report.

Capital One and Citibank eliminated overdraft and NSF fees entirely, which is reflected in their more than 100% drop in associated revenue in 2023 versus 2019. USAA experienced a 90% decline in 2023 revenue.

Ginoris López-Lay,FirstBank’s executive vice president of strategy management

Puerto Rico banks such as Banco Popular, FirstBank and Oriental Bank have moved to reduce or eliminate overdraft/NSF fees in recent years.

In August 2022, Banco Popular announced the elimination of NSF fees and overdraft fees on transactions of $5 or less paid against insufficient funds, as well as the fees charged for maintaining overdrawn accounts. Transactions greater than $5 paid against insufficient funds would continue to be charged the overdraft fee of $15, according to the bank, which declined to comment further on the matter.

In March 2023, FirstBank adjusted its NSF fees “in line with the recommendations established by regulators,” the bank told News is my Business.

“Considering the benefit to our customers, we decided to eliminate the fee for each returned check or ACH [Automated Clearing House] transaction returned for either insufficient funds or unavailable funds, for both individual and commercial accounts. We also eliminated the overdraft financing fee for individual accounts,” said Ginoris López-Lay, FirstBank’s executive vice president of strategy management.

Oriental Bank did not respond to News is my Business’ request for comment by the time the article was published.

Author Details
Author Details
G. Torres is a freelance journalist, writer and editor. She’s worked in business journalism for more than 25 years, including posts as a reporter and copy editor at Caribbean Business, business editor at the San Juan Star and oil markets editor at S&P Global Platts (previously a McGraw Hill company). She’s also worked in marketing on and off for decades, now freelancing for local marketing and communications agencies.

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