HomeBusinessFinanceBiden’s War On ‘Junk Fees’ Won’t Help Americans’ Overdraft Problem

Biden’s War On ‘Junk Fees’ Won’t Help Americans’ Overdraft Problem

Observations From the Fintech Snark Tank

A White House press release titled Readout of the Third Meeting of the White House Competition Council reported that:

“The Consumer Financial Protection Bureau has taken steps to address the nearly $30 billion in ‘junk fees’—such as late fees, overdraft fees, bounced check fees—that Americans pay every year. Spurred by CFPB actions, three-quarters of the nation’s 20 largest banks are getting rid of bounced check charges. The overall level of overdraft fees is on track to be down $3 billion in 2022, compared to pre-pandemic levels.”

A new study from Cornerstone Advisors, commissioned by Velocity Solutions, titled Beyond Overdraft: Helping Consumers Manage Liquidity suggests that this might not be good news for Americans—and not in line with what they what from the banks they do business with.

The Hidden Fee Fallacy

Politicians (and other critics of the banking industry) love to criticize banks for the allegedly “hidden fees” they charge their customers.

Americans have a different perspective.

Eight in 10 Americans—including two-thirds of Gen Zers, eight in 10 Millennials and Gen Xers, and nearly nine in 10 Boomers—told Cornerstone that their primary checking account providers adequately discloses their fees.

This finding is ignored by the press and overlooked by the CFPB, who has worked for years to impose additional disclosure requirements on banks, assuming that banks must be withholding information. The survey data doesn’t back up that thinking.

Many Americans Think Bank Fees are Fair

And for all the press and attention being paid to checking account fees, three-quarters of Americans believe that their primary checking account provider’s fees are fair, ranging from six in 10 Gen Zers to eight in 10 Baby Boomers.

Just 27% of consumers believe NSF (non-sufficient funds) fees—which are charged when the bank doesn’t pay an item for the customer—and overdraft fees, which are paid when the bank does pay an item for the customer, aren’t fair.

That’s not to say, however, that the rest think they are fair. Four in 10 Americans believe the NSF and overdraft fees their banks charge are fair, but a third say they don’t know or they’re not sure.

Listening to the White House, however, you would think that all Americans are railing against these fees. Which are somehow hidden.

Attacking ‘Junk Fees’ Doesn’t Address the Real Problem

Reducing, or even eliminating, overdraft and NSF fees won’t solve the real problem that Americans are struggling with: Liquidity.

In 2021, 70% of Gen Zers and two-thirds of Millennials spent more money than they had in their checking accounts at least once, and a quarter of both generations did so three or more times.

The reasons for this are numerous—including unforeseen large expenses, unexpected income shortfalls, excessive spending, and unemployment.

What do Americans do when faced with this liquidity issue? They turn to a wide variety of tactics including borrowing from friends and family, incurring late fees by not paying their bills, taking out payday loans, applying for short-term loans, and even selling their possessions at pawn shops.

The Real Culprit and the Wrong Response

It’s not ‘junk fees’ that are causing Americans the most damage—it’s inflation, interest rates, and a weak economy.

The recent change in many financial institutions’ overdraft policies is good news for consumers, and actually good for financial institutions—from a regulatory and public relations perspective, that is.

From a revenue perspective, it’s a different story, as many institutions are facing millions of dollars in lost fee income. According to Steven Simpson, senior director at Cornerstone Advisors:

“Waiving overdraft fees may sound like a big win for consumers. The issue is not so cut and dried, however, because the consumer banking model that delivers convenient branches, contact center, digital banking, debit cards, fraud protection limits, cybersecurity, and access to larger amounts of cash needs revenue to sustain itself.”

Increasing monthly account fees is not a feasible reaction, however, as that will likely result in lost customers. Nearly seven in 10 customers said they would close their account and find another bank if their bank increased the monthly account fee by $15.

Americans Need Better Liquidity Management

To address this problem—and recoup lost millions in fees—banks and credit unions must transform their overdraft programs into liquidity management programs. These programs should:

  • Be proactive and personalized. A “managed” program assigns overdraft limits based on a variety of account holder data points, including specific deposit and overdraft activity. Institutions should establish a risk profile for each account and assign individualized overdraft limits based on the account holder’s ability to repay the overdraft.
  • Be fast. Consumers like the speed of immediate availability using overdraft, with many saying they would want the overdraft option if they needed funds to make a $500 purchase (44%, compared to 17%, 22% and 15% for 4-hour fast-access loans, 24-hour regular loans, or 5 days for line of credit applications, respectively).
  • Establish a “de minimis exception.” A de minimis exception is a minimum overdraft amount below which the institution won’t charge a fee. Banks can provide this exception on a per-item basis or per-day basis. This policy is a consumer-friendly practice to prevent the “$30 fee for a $3 cup of coffee” headline scenario.
  • Use tools to limit overdraft fees for low-income consumers. Charging $400 to a consumer who has $2,000 a month in deposits is not in the best interest of the consumer or the financial institution. Software is available that can reduce usage of the overdraft service (and the associated fees) when fees exceed a given percentage of the consumer’s deposits.
  • Provide a variety of credit alternatives. Banks have scrambled to replace lost interchange from buy now, pay later (BNPL) purchases, but the bigger issue may be the erosion of the consumer relationship due to other providers offering credit at the consumer’s point of need. Banks’ liquidity management programs should offer a range of credit alternatives including BNPL and referrals to providers who can offer small-dollar short-term loans.

For a complimentary copy of the report, Beyond Overdraft: Helping Consumers Manage Liquidity, click here.

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