Is Life After NSF a New Reality?
Revenue generated from overdraft fees has been on a steady decline for the past decade, driven by changes in consumer behavior combined with political and regulatory pressures. There’s been a recent surge in changes to overdraft programs from many financial institutions, and banks and credit unions need to consider how much of an impact these market changes might have on the organization and business model.
As an industry, non-interest income started to become a bigger piece of the revenue equation in the mid-1990s. As the interest rate spread between deposits and loans became more compressed, the reliance on non-interest income such as overdraft fee income really took off in the mid-2000s. In addition to NSF and overdraft fees, mortgage origination fees and interchange revenue from debit and credit card transactions make up a significant portion of non-interest income.
Based on data from individual institutions participating in the Raddon Performance Analytics program, this trend translated to nearly $100 per checking account in annual NSF and overdraft fees for the typical financial institution at its peak in 2008. Keep in mind this is an average per checking account, so it is inclusive of the majority of checking accountholders who never overdraw their checking account.
In the aftermath of the Great Recession, NSF fee income dropped steadily due to changes in consumer behavior, increased regulation including new overdraft opt-in requirements, and continued adoption of mobile and online banking services making it easier for consumers to monitor their spending and checking account balances. The result was NSF revenue declining by 27 percent between 2008 and 2019. The downward trend continued in 2020, also influenced by COVID-era fee waivers, reduced consumer spending, and a rise in consumer checking and savings balances.
Thus far in 2021, the trend appears to be continuing, with Raddon data projecting the typical institution generating $52 in overdraft revenue per checking account.
In spite of these trends, the need for overdraft services has not waned in the past two years. According to consumer responses in nationally representative Raddon Research Insights surveys conducted in 2020, 32 percent of consumers have overdrawn their checking account within the past two years. This is an increase from the 23 percent of consumers reporting the same in 2018, with the biggest swing coming from a larger number of more habitual overdrafters.
As the Consumer Financial Protection Bureau (CFPB) awaits confirmation of its next leader, President Biden’s nominee Rohit Chopra, some financial institutions have proactively started making changes to their overdraft programs as expectations are that this will be an area of focus under a Chopra-led CFPB. A few recent announcements and product promotions related to overdraft services include:
- Ally Bank announced in June the elimination of all overdraft fees, communicating to accountholders, “After some learning and reflecting, we’ve decided it’s time to do away with overdraft fees once and for all. It makes sense and it’s just the right thing to do.”
- PNC Bank launched its Low Cash Mode feature in April, touting it as a way of “addressing the $17 billion that some studies estimate U.S. consumers pay each year in overdraft fees.” Low Cash Mode sits inside PNC’s Virtual Wallet and gives accountholders more control over prioritizing transactions that may lead to an overdrawn account, while also giving the consumer more time to prevent and address potential overdrafts that may otherwise trigger a fee. PNC’s CEO William S. Demchak lauded the new tool as a way “to shift away from the industry’s widely used overdraft approach, which we believe is unsustainable.”
- University of Wisconsin Credit Union reduced its overdraft fee from $30 down to $5 in July, citing that “everyone comes up short sometimes.” UW Credit Union CEO Paul Kundert explained that “while some fee is necessary to discourage behaviors that may harm local businesses and other members, it should be reasonable and applied equitably.” The credit union also offers checking account options for consumers that prefer to have no overdraft service at all attached to their account
- In September 2020, Huntington Bank introduced a 24-hour grace period for consumer, business and commercial customers, allowing for additional time to cover overdrafts. At the same time, the bank also rolled out a no overdraft fee $50 Safety Zone, allowing accounts to be overdrawn by $50 or less without a fee
- Chime has promoted its SpotMe feature for several years, which allows accountholders to make debit card purchases that overdraw the account with no overdraft fees. (Limits start at $20 and can be increased up to $200.) Chime introduced SpotMe Boosts in April, allowing Chime users to boost the SpotMe limits of other Chime users they know
- Chase and Bank of America continue to promote their “no overdraft fee” checking account options, Secure Banking from Chase, and Advantage SafeBalance from Bank of America
Market changes like this are eerily similar to what the industry experienced in 2009, when Chase, Bank of America and Wells Fargo made major changes to their overdraft programs ahead of new regulation being put in place. At the time, the nation’s three largest banks instituted changes such as a lower daily cap on the number of overdrafts a customer could incur, new debit posting orders, and various opt-in and opt-out options not previously available. While many of these changes may have been consumer-friendly on the surface, they also coincided with most of the large banks moving away from offering totally free checking, which relied on NSF income to subsidize the product portfolio’s profitability.
What Should You Do?
From a revenue perspective, as shown in the earlier charts, debit card interchange has supplanted some of the lost non-interest income from the past decade, but that also has come under pressure as consumer payment options proliferate. Financial institutions should consider the risk associated with further degradation of NSF and overdraft revenue, understanding:
- How reliant on overdraft fees are your earnings today?
- How do you offset any lost revenue?
- Are there new or existing competencies, such as wealth management, that your organization can develop to garner new sources of non-interest income?
The steady decline of overdraft income also plays a significant role in the evolution of the importance of checking accounts to financial institutions. While checking accounts have always represented a significant opportunity to improve accountholder engagement and develop cross-sales, they take on even greater importance when direct revenue is challenged. In this context, the transaction data associated with active checking accounts may be even more valuable than any of that lost revenue, if leveraged effectively.
Data becomes the new currency as it offers an unparalleled glimpse into the financial needs of each checking accountholder. Where else can you glean information such as:
- Payments being made to competitors, allowing your institution to identify mortgages, equity, auto loans and credit card accounts being held elsewhere
- Investment contributions – where, how much and how frequently
- Student loan payments
- Fintech products being used such as ancillary P2P providers
The Bigger Question
Life after NSF fee income may be a new reality for the industry, but life with insufficient funds is a continued reality for many consumers. Regardless of overdraft policy or fee changes, it doesn’t solve the root of the issue for the nearly one-third of consumers who have overdrawn their checking account in the past two years. While some of this overdraft activity may be incidental, it speaks to a bigger financial wellness need for many consumers. As part of your strategy discussions on overdraft services, consider how to better promote your educational resources and the technology tools available to help consumers better manage their finances. Improving financial wellness is a benefit for all.