Are Overdrafts Fees An Endangered Species?

June 3, 2021 at 9:06 am Leave a comment

Overdraft fees have recently been put under the microscope once again and it does feel like the pieces are falling into place to see new restrictions placed on this product.

First, there is the news that overdraft fees dropped dramatically during the pandemic. The Wall Street Journal reported yesterday that overdraft revenue fell in 2020 for the first time in six years. The paper reports that banks and credit unions brought in $31.3B in overdraft revenue in 2020, a drop of almost 10 percent from the previous year. This is hardly surprising since the huge influx of savings has given many consumers a bigger financial cushion.

An even more intriguing development is highlighted in today’s American Banker which notes the growing numbers of banks that are offering overdraft fee alternatives. On Wednesday, Ally Financial announced that it will permanently stop charging overdraft fees. According to the AB “these firms are reducing or eliminating their reliance on overdraft fees at a time when regulatory scrutiny seems likely to increase, and as competition from lower-cost alternatives is on the rise.”

These changes are taking place in a political environment focused on issues of economic equality like never before. In 2017 the CFPB issued a report concluding that overdraft services are disproportionately used by individuals with lower credit scores who have less access to credit. The report didn’t have much of an impact but in 2021 this is precisely the type of factoid that is galvanizing individuals to push for changes to the banking system.

Finally, there is the ubiquitous class action litigation involving the accuracy of overdraft disclosures. While I think much of this litigation can be preempted with appropriate changes to account agreement language, judges are scrutinizing overdraft practices like never before. 

What does all this mean? It means that your credit union should begin preparing for the day when the revenue it receives from overdraft fees is dramatically reduced. Unfortunately, this is easier said than done. A report released in May by the Brookings Institution highlighted anecdotal evidence that small lenders and credit unions have grown increasingly dependent on overdraft fee income.

On that happy note, enjoy your day.

Entry filed under: Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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