How Banks Make Money from Overdraft Fees

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New bank regulation rules sought to provide more transparency in the amount of revenue banks collect from overdraft and insufficient fund fees. It was decreed that all banks with assets totaling one billion dollars or more must disclose all overdraft fees charged during the financial quarter. Approximately six hundred banks fell into this category and reported that they collected over two and a half billion dollars in the first three months of 2015 as this sample essay will discuss. 

Bank cash in on overdraft fees

The way that banks make their money from overdraft fees is oftentimes questionable and has garnered notice from the Consumer Financial Protection Bureau. While some banks are being investigated for suspicion of improper practices, others have already been determined to be guilty and have been ordered to repay millions in fees and reimbursement. 

Breaking down the banks

Banking regulations have forced the six hundred most successful and wealthy banks in America to disclose all data related to money collected form overdraft fees. This has never happened before, so when it was revealed that these six hundred banks had already collected more than two and a half billion dollars in three months was staggering.

Though the amount of money the banks have made thus far this year is slightly overwhelming, the money actually only totals approximately five percent of their total non-interest income reported. Still, this amount makes up thirty four perfect of total fees collected from consumer accounts. 

The percentage of total revenue that is provided by overdraft and insufficient fund fees varies greatly depending on the bank itself. For example, TD Bank made almost one hundred and three million dollars in overdraft charges, which made up thirty percent of their total fee income for the financial quarter. While the fees make up a large chunk of total revenue for some banks, that is not that case for all.

Constantly, PNC Financial Services Group collected less than six percent of their total fee income for the quarter from overdraft activity, while Ally Bank, an online banking institution, received less than one percent of their fee income from overdraft and insufficient fund fees. 

Questionable banking behavior

There are questions about the legitimacy of these fees, however, as banks are only supposed to charge customers the overdraft fees from using an ATM if the customer had previously agreed to get the money despite the overdraft fee. This rule only applies to overdraft fees from getting cash from the ATM; banks are still allowed to charge overdraft fees if an account goes negative due to a check being cashed or an automatic payment.

Despite the opt-in rule, a study in 2014 found that over 50% of people who overdrew their accounts did not recall being informed of or consenting to the overdraft service (Long 2015). The option to opt into such charges isoften hidden deep within other stipulations and are rarely explained or identified. One customer expressed concern and aggravation over the overdraft fees, which have the tendency to snowball out of control as multiple fees are applied per day. Most banks purposely try not to disclose this information, because they make billions from fees.

“It’s happened to me where I’ve had $300-$400 worth of overdraft fees just from making one mistake,” (Mehlhaf 2015).

Luna Jaffe, CEO of Lunaria Financial- an esteemed financial planning and investment group in Portland, Oregon- sees this kind of manipulation seriously affecting people’s financial situations every day.

“The biggest mistake I see is people pay too much on their credit cards and not saving some… for the overdrafts. They think it’s okay to get their bank account down to one hundred dollars, it’s not.” (Mehlhaf 2015).

Because of the ways banks employ their overdraft fees, a small mistake could leave someone owing hundreds of dollars, which to some can be debilitating.

JP Morgan Chase, Bank of America, and Wells Fargo

Though there have been efforts to control overdraft charges since the 2008 financial crisis, these fees are still an incredible money-maker for banks, markedly JP Morgan Chase, Bank of America, and Wells Fargo. In the first three months of 2015, these three banks have pulled in more than one billion dollars (Fernandes 2015). At this rate, these three banks are on track to make four and a half billion dollars this year in overdraft fees alone. This number comes out to about twenty dollars for every American adult (Long 2015). 

These banks are being investigated by the Consumer Financial Protection Bureau specifically for their overdraft fees. The Bureau is paying specific attention to cases in which an individual is charged multiple overdraft fees in the same day. During the investigation, banks were forced to release all records of overdraft fees taken during 2015.

Though the numbers that JP Morgan Chase, Bank of America, and Wells Fargo brought in from overdraft fees this quarter are staggering, these fees account for less than six percent of their revenue, not including interest (Long 2015). While these bigger banks have other means to make their money, like investment funds, bond and stock trading, etc., not all banks have those options.

Smaller banks and credit unions

Big-name banks are not the only financial institutions that make a significant amount of money from overdraft fees, though. Two Texan banks, for example, Woodforest National Bank and First National Bank, make more than forty percent if their non-interest revenue from overdraft charges (Long 2015). Though considered ‘small’ banks, Woodforest has branches in seventeen states while First National has branches in three.

Combined with JP Morgan Chase, Bank of America, and Wells Fargo, all six hundred banks made to disclose their totally revenue made from overdraft fees made over two and a half billion dollars between January and March of 2015 (Long 2015). 

Regions Bank

One bank was found to have been dishonest and unethical in their practices in regards to overdraft fees. Regions Bank, based in Birmingham, Alabama, has been told to pay seven and a half million dollars in fines for improperly charging overdraft fees. Regions Bank has branches in sixteen different states and committed their misconducts against hundreds of thousands of customers. The bank charged overdraft fees to customers who had not open-in to receive overdraft fees and be allowed to withdraw money they did not have (McCoy 2015).

The indiscretion does not end there, though; in addition, despite statements that they would not, charged customers for overdraft and insufficient funds fees for it’ short-term loan program (McCoy 2015). Their overdraft fees of thirty six dollars per transaction were charged over and over again for months before anyone ‘learned’ that the charges were inappropriate. Still, they were not immediate to remedy the situation.

Deputy enforcement director of the Consumer Financial Protection Bureau Cara Petersen states that,

“Regions amplified this harm by letting it drag on for almost an additional year after the bank discovered the violations. In the end, hundreds of thousands of consumers paid at least forty nine million dollars in illegal charges,” (McCoy 2015). 

Despite having refunded the majority of the improper fees already, the Consumer Financial Protection Bureau enforces bank regulation and has dictated that the bank will not only pay back every single customer for every single illegal charge, but the bank must also pay an addition almost eight million dollars in fines. In addition, the bank is also required to review and correct any instances where the overdraft fees negatively influenced customers’ credit scores.

In an official statement from the bank, a representative said,

“After discovering that a small subset of customer had been charged fees in error, we reported it to the Consumer Financial Protection Bureau and began refunding fees. We believe the vast majority of the refunds have been completed and we have made changes to our internal systems to resolve these matters,” (McCoy 2015). 

The indiscretion comes in where Regions Bank charged overdraft fees on ATM and one-time debit card transactions when the customers never opted into those charges. This directly violates federal regulation set up in 2010 barring banks from charging overdraft fees where the customer has not consented to receive money even if they do not have it in their accounts (Bruce 2013).

In such cases, the banks are supposed to decline the transaction, but Regions Bank chose not to. The bank also participated in some other troubling behavior, as well. For example, they allowed customer to link their checking accounts to their savings accounts or lines of credit without giving them the chance to opt in for overdraft protection if a transaction exceeded the available balance. The banks processed the transactions anyways and collected overdraft feed (McCoy 2015).

After executives became aware of the improper fees, it took almost an entire year for them to even begin making corrections to their mistakes, in addition to misrepresenting the insufficient fund and overdraft fees in regards to the bank’s short term loan program. 

The bank has now been making more consistent efforts to correct their illegal behavior. Regions Bank willingly and voluntarily reimbursed the almost thirty five million dollars to the wronged clients, who number nearly two hundred thousand (McCoy 2015). Almost a year later, the Consumer Financial Protection Bureau found that even more customers had been effected than previously believed, and Regions Bank paid out an additional almost thirteen million dollars to the effected customers. Recently, in January of 2015, even more cases were identified in which clients were wrongly charged for overdraft or insufficient fund fees, and the bank has announced plans to reimburse those customers as well. 

Preventing Future Fees

In light of this investigation and the data released in reports, the Consumer Financial Protection Bureau announced that they would take a closer look at rules that regulate insufficient fund and overdraft fees. In addition, they have discussed an interest in putting a cap on the amount of money that banks can make per quarter from overdraft and similar fees.

In addition, the Consumer Financial Protection Bureau has noted intentions to reordering transaction from high amounts to low amounts, which is believed to help decrease the frequency of overdraft penalties, and other regulations that will limit the amount and the frequency of the penalties (“FDIC” 2015). Consumer behavior dictates that more and more people are moving to credit unions. It is hoped that these new rules and guidelines will be beneficial for the economy and consumers alike, helping to regulate the large overdraft fees we have seen thus far and making sure more consumers can be financially successful.

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Conclusion

The behavior practiced by the aforementioned financial institutions has undoubtedly raised some red flags. While some banks simply employ questionable and unclear tactics in collecting overdraft or insufficient fund fees, others have outright violated the law while collecting such fees. The actions exhibited by these banks have allowed them to wrongly take money from customers and even negatively affect client’s credit scores, something that could have a lasting effect on their lives if not remedied.

These occurrences have caught the attention of both the FDIC and the Consumer Financial Protection Bureau, who have launched investigations into the overdraft regulations held by the banks in question. By implementing new rules and updating old ones, it is hoped that the amount of money collected by banks in overdraft fees will be more closely regulated and kept under control.

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Works Cited

"FDIC Says Overdraft Fees Gave Banks $2.5 Billion in First Quarter Non-Interest Income." PYMNTScom. 1st In Media, 1 June 2015. Web. 03 June 2015.

Bruce, Laura. "FDIC Study: Outrageous Overdraft Fees." FDIC Study: Outrageous Overdraft Fees. Bankrate, Inc., 2013. Web. 03 June 2015.

Long, Heather. "Overdraft Fees Top $1 Billion at the Big 3 Banks." CNNMoney. Cable News Network, 27 May 2015. Web. 02 June 2015.

Mehlhaf, Nina. "Banks Making Billions on Overdraft Fees." KGW. KGW News, 27 May 2015. Web. 03 June 2015.

McCoy, Kevin. "Regions Bank Fined $7.5M for Overdraft Fees." USA Today. USA Today, 28 Apr. 2015. Web. 3 June 2015.

Williams, Mark. "Top 3 Banks Collected $1.1 Billion in Overdraft Fees in 1st Quarter." The Columbus Dispatch. The Dispatch Printing Company, 1 June 2015. Web. 03 June 2015.