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Falling Overdraft Takes A Bite Out Of Banks’ Bottom Line

Under pressure from new regulations and their customers, banks are seeing overdraft frees fall and taking some of their profitability down with them.

While the overdraft free has long been an easy source of funds, it has been on the decline for the last several years, and new data indicates that it may be falling faster than ever, reports the Wall Street Journal.

A report released by Moebs Services Inc., an economic-research firm in Lake Forest, Ill, indicates that banks, credit unions and other financial institutions brought in around $30.6 billion in overdraft fee revenue this year – an amount down 4 percent from 2014, the biggest such decline since 2011.

And that big a tumble could damage bank earnings. Overdraft fees account for an average of roughly 6 percent of earnings at banks with at least $10 billion in assets. Overdraft also accounts for 32 percent of service charges on checking, savings and other deposit accounts.

“At the end of the day, these people are our customers and we’re treating them with a got-you product,” said PNC Financial Services Group Inc. Chief Executive William Demchak at a May investor conference. “So I think through time that something’s got to give, and you’ll get a big debate on this.”

The big changes to overdraft came in 2010 when the Fed amended what is known as Regulation E to prohibit banks from charging for overdrafts when consumers use a debit card while shopping or to make withdrawals from automated teller machines, unless consumers choose to opt in for overdrafts.

“Banks have to adjust just like they did” with other regulations that went into effect in the wake of the recession, said Richard Hunt, chief executive of the Consumer Bankers Association, which represents large and regional banks and other financial institutions. “This is another avenue that we have to take, [and] it hurts revenue.”

However, regulator interest in overdraft carries on –  the CFPB  is reviewing overdraft practices at banks as well as credit unions and is widely expected to release new rules next year that could see the fees further curtailed. Rule changes could include formally banning banks from reordering consumer transactions from high to low, in which institutions process the largest transaction first, which increases the chances that a checking-account balance will fall below zero earlier and will incur more overdraft fees.

There is some evidence that banks are bracing for a regulatory backlash and are reigning in their practices. Median overdraft fees, which had risen for years, have remained at $30 since 2013.

The impact on revenue and earnings could be much larger for smaller banks than for large ones. Overdraft fee revenue accounts for a greater share of revenue at banks with less than $1 billion in assets.

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