U.S. financial institutions brought in more money from overdraft fees in 2016 than any year since the financial crisis, according to recent data. But the largest Nebraska banks are bucking that trend — they collected less in overdraft fees last year than they did in 2015.
It could be a one-time blip in the data that’s made Nebraska banks go the other way from their national peers. It could be that people are writing fewer checks. Or it could be that a relatively strong economy — with one of the country’s lowest unemployment rates — means there’s less reason for people to overdraw their accounts.
Or, says at least one bank, it could be any of the above combined with new programs meant to steer people into less-expensive ways — like a line of credit — to deal with shortfalls in cash.
U.S. banks, savings and loans and credit unions claimed $ 33.3 billion worth of revenue from overdraft fees in 2016, up from $ 32.5 billion a year earlier, according to the latest data from Moebs Services, a bank research firm. The 2016 figures represent the most revenue collected from overdraft fees since 2009 — in the wake of the financial crisis — and also the largest year-over-year percentage increase, 2.5 percent, since then.
That was also the year before the Federal Reserve enacted a rule that prohibited banks from automatically hitting customers with overdraft fees for transactions made with debit cards or at automated teller machines. Starting in 2010, banks were required to get customers’ permission before charging them for overdrafts.
The nation’s three largest banks — JPMorgan Chase, Bank of America and Wells Fargo — each saw modest increases to their overdraft revenue in 2016.
But among the largest Nebraska-based banks, those revenues were either flat or heading the opposite direction from 2015 to 2016.
At First National Bank of Omaha, which holds more deposits in Nebraska and in Omaha than any other bank, overdraft fee revenue fell 21 percent to $ 5.9 million in 2016.
It’s the result of the bank’s decisions in 2013 to cap the amount of overdrafts a customer could incur in a single day to four, and also to establish limits that would void fees for small-dollar overdrafts, the bank says. Before, there were no limits on either.
“We started to notice that a lot of fee revenue was coming from a small cohort of customers that habitually abused their account,” said Jerry O’Flanagan, First National’s head of consumer banking. “It wasn’t uncommon for anyone in this small group to overdraft 100 to 150 times a year.”
At the rate of $ 33 each, that means some First National account holders were shelling out as much as $ 5,000 a year or more just on overdraft fees.
Today, First National account holders face a $ 33 fee a piece for up to 4 overdrafts in a single day; those fees are waived if an account is overdrawn by $ 20 or less, however, or if the transaction in question is $ 20 or less.
“I think we’re taking away a significant source of customer angst and frustration around these nuisance fees and we feel good living up to our philosophy, which puts the customer in the center,” O’Flanagan said.
Indeed, consumers’ and bankers’ relationships are complicated when it comes to overdraft fees, those expensive penalties that financial institutions levy on customers when they transact for amounts that exceed checking account balances.
These fees range from as low as $ 5 to as much as $ 50, Moebs’ research found. The median fee in the U.S. in 2016 was $ 30, where it peaked in 2013 and has been the same since.
Maligned by some critics as predatory, overdraft charges can mean the difference between paying $ 1.39 or $ 31.39 for a 2-liter bottle of Coke. And that’s only the beginning.
“The bank fee is only the tip of the iceberg,” in some cases, says Bob Sutton, director of compliance at American National Bank.
That’s because banks can opt to not cover an overdraft transaction, which can also put the account holder at risk of getting dinged again by the merchant for what’s essentially a bad check. Add up to $ 35 for merchants’ troubles to $ 33 for an overdraft at American National — maybe throw in a trip to a payday lender to stem short-term financial woes, too — and costs stack up quickly.
Consumer advocates like the U.S. Consumer Financial Protection Bureau, a federal agency, and the Pew Charitable Trusts have knocked such fees because they say the burden falls disproportionately on financially vulnerable consumers. The CFPB has even gone after individual banks for what it alleged are unlawful or deceptive overdraft practices. Both organizations have advocated for changes.
“The prevalence of fee-based overdraft programs at both large and small banks underscores the need for new policies to prevent ‘courtesy’ overdraft programs from being costly and unsustainable forms of short-term credit for many financially vulnerable consumers,” said Nick Bourke, director of Pew’s consumer finance project, in late 2016. “Regulators should set reasonable limits on overdraft fees and help banks create new small-credit options for those who want them.”
Others, like economist Mike Moebs, see them as a necessary evil. Simply put, “Overdrafts are needed,” said Moebs, who is also an accountant and chief executive of Moebs Services, an economic research firm situated north of Chicago. “There’s not much out there to (replace overdraft fees), and the reason is that overdrafts are unsecured credit.”
In other words, it’s credit a bank offers without any collateral — like a house or a car.
Omaha-based American National saw revenues from overdraft fees it charges fall 9 percent to about $ 2.7 million in 2016. It’s the No. 5 Nebraska-based bank in terms of in-state deposits, according to the latest regulatory figures.
Its $ 33 per-item fee can be applied up to 8 times in a single day, Sutton said. That means someone could potentially rack up $ 264 in overdraft charges in one day.
The bank in 2016 introduced a new program that keeps track of customers who habitually overdraft their accounts and triggers automated mailings to encourage them to take advantage of other bank services to avoid bouncing checks over and over.
For instance, they could open savings accounts to link to their checking accounts. When their checking account comes up dry, the savings account is automatically debited — avoiding an overdraft fee.
That program played some part in declining overdraft revenues, but Sutton said the results have not yet been “robust.” Still, it’s growing: About 1 in 10 American National customers responded to those communications last year and that rate was up to about 20 percent in the first quarter of this year.
Of course, no matter how proactive financial institutions get, and no matter how healthy the economy is, there will always be people who spend more than they can afford. And that can be good for a bank’s bottom line.
Without fee income, 55 percent of banks, savings and loans and credit unions would have posted net losses instead of profits through the first three quarters of 2016, Moebs’ research found. Those fees don’t come exclusively from overdrafts; they’re also generated by bank business lines like wealth management, for example.
In the post-recession financial services industry, Moebs says, fee income has become increasingly vital to meet regulatory standards that call for banks to hold higher levels of capital — or money in the bank, essentially — in case of trouble.
And changing customers’ behavior in any industry is a tall order: Even going back to 2001, account holders have averaged more than 1 billion overdrafts each year, Moebs says.
In other words, fees — overdraft or otherwise — aren’t going away any time soon.
“This is a conservative number, but there are 43 million Americans that have problems with their finances,” Moebs said. “What are you going to do with them if overdrafts go away? What are you going to replace it with?”