While banks were denounced as villains of the 2008 recession, their response to the COVID-19 crisis had some calling them heroes.
The praise was based on their work acting as lenders for the prolific Paycheck Protection Program. But many also got credit for waiving fees to customers amid the financial turmoil, including fees for credit card transactions, account maintenance fees, ATM withdrawals and overdraft fees.
The fee suspensions were temporary, but the pandemic has put pressure on banks to consider more-permanent changes to whether and how they collect fees on customers who overdraft their accounts.
“The events of the last year have really accelerated a reevaluation in what was already a declining source of revenue,” R. Scott Siefers, managing director for Piper Sandler Cos., said of overdraft fees.
Indeed, bank revenue from overdraft fees has been falling since 2010 due to federal banking regulations imposed in the fallout from 2008. Revenue from overdraft fees took a steeper drop in 2020, down 10% over the prior year to $31.3 billion across the country, amid pandemic-driven fee suspensions, according to economic research firm Moebs Services Inc.
Most banks have resumed overdraft charges and other fees and have seen revenue climb again. Rhode Island-based Citizens Financial Group Inc. saw its service-based fee income increase 16% to $100 million in the second quarter of 2021, compared with a year ago.
‘Big banks especially are really worried.’
PETER J. NIGRO, Bryant University Sarkisian chair of financial services
But whether banks can continue to depend on that revenue remains in question. The change in political leadership in Washington, D.C., following the 2020 election has reignited a consumer-conscious agenda that includes cracking down on financial institutions for “gouging” customers through overdraft fees.
At the same time, competition from fintech firms offering low or no fees is pushing some major banks to change their overdraft fees on their own.
Recently, Utah-based Ally Bank abolished its $25 overdraft charge, and TD Bank rolled out a fee-free, checkless deposit account called TD Essential Banking. At the same time, the American subsidiary of Toronto-based Toronto-Dominion Bank increased the amount that needs to be overdrawn for a charge to kick in and cut the number of times in a day that a customer can incur overdraft fees.
Alissa Van Volkom, TD Bank executive vice president and head of consumer deposits, products and payments, said the changes are part of the bank’s mission to reach the “unbanked,” low-income people who don’t have accounts at traditional financial institutions.
It’s not just generosity toward customers that’s driving the changes. The growing number of fintech firms and new, challenger banks has put pressure on conventional institutions, said Peter J. Nigro, the Sarkisian chair of financial services at Bryant University.
“Big banks especially are really worried about these types of financial institutions cutting into their margins,” Nigro said.
For the same reason, banks may find it difficult to hike other charges to offset a loss of overdraft fees.
But while some banks stand to lose revenues, those that do cut fees could see an influx of new depositors.
“If we are able to bring in more customers who open more accounts with us, that gives us the opportunity to reduce some of those fees without really taking a hit,” said Terry Telesmanick, senior vice president of bank operations for West Warwick-based Centreville Bank.
Centreville has yet to make any moves on changing its fees for overdrafted accounts, though the bank is in the midst of a two-year review of all services and fees, Telesmanick said.
In the meantime, it’s looking to decrease its dependence on fees by growing in other areas, such as commercial and interest rate swap loans, she said.
Centreville is not alone.
The spread between interest income generated by banks versus the amount of interest paid out to depositors – known as the net interest margin – has traditionally been a reliable way banks make money, but in a near-zero interest rate environment, increasing that revenue appears unlikely.
Instead, many banks have looked to fees to bolster their bottom lines, including those related to wealth and asset management and capital markets investment services, Siefers said.
“Investors and banks look at these offerings more like annuities that are less susceptible to the ebbs and flows of interest rates and offer a higher value to investors,” he said.
For now, overdraft charges still make up a significant portion of fee income, though Siefers warned that “the train has left the station” when it comes to rethinking these fees.
That doesn’t mean overdraft fees will go by the wayside entirely. Instead, Siefers predicted that changes such as reducing the amount of the fees, as well as its frequency or extending grace periods are likely to become the norm.
Nancy Lavin is a PBN staff writer. Email her at Lavin@PBN.com.
