Last week, Chase joined the ranks of Capital One, USAA, Frost Bank, OneWest, Huntington, Northern Trust and others and announced that in August, the Bank will no longer charge for overdraft transfers on its retail or small business accounts. In addition to eliminating the $10 transfer fee charge, Chase will also not allow customers to draw on their credit card line to fund overdrafts and will thus limit transfers from savings and established lines of credit. Why are these banks doing this and is this a trend?
What About Fee Income?
If you don’t have the money and you overdraft your account, retail and small business customers often get hit with a $35 per transaction charge that is usually capped. However, if you do have the money and you just need to transfer it from another checking or savings; many banks will charge a fee between $5 and $15. This is the fee that Chase is now eliminating.
This will undoubtedly hurt Chase as their fee income from overdraft is already below average at 41% of account service charge revenue compared to about 65% at most banks. However, they do a good enough job at generating fee income (composes 51% of total revenue) that this revenue stream will not be missed.
Why Are More Banks Doing This
Banks are doing this for primarily 3 reasons. Mostly, it is the right thing to do. While a $25 or $35 dollar overdraft fee can be justified because it is basically an unsecured loan with no formal loan agreement, it is hard to argue that it cost a bank $10 to take money from your savings account (or money market account which a small percentage of banks allow) and automatically transfer it to your checking account. From a customer engagement point of view, fees are a consistent issue and overdraft transfer fees is one fee that usually gets brought up when customers are polled about “unjustified fees.”
As can be seen above, overdraft related fees are the 4th most common complaint, according to the CFPB.
The second reason is that waiving this fee makes it easier to limit the use of credit card transfers. Credit card transfers, while convenient, are not only thought to be enabling of weak financial practices, but also expensive. Customers that have overdraft protection and transfer capabilities have 7 times more overdrafts than those that have not opted in for protection (keep in mind that there is some self-selection going on).
As most of our readers know, credit card transfers usually incur interest charges immediately and often at a higher rate than the rate charged on purchases. While cheaper than paying the $35 dollars, calculating the implied rate on the $10 charge combined with the higher credit card interest rate still does not look good to the public. This is even more so, when you consider that the average overdraft amount is less than $50.
The third reason is (and some would argue the primary reason), that as of last year, banks over $1B have to report consumer overdraft and NSF fees to the CFPB which the Bureau turns around and publishes. Overdraft fees are, and will continue to be, a focus for the CFPB. Once published, your bank runs the risk of being easy fodder for your local press and consumer groups looking to highlight how banks are “taking advantage” of their customers. Chase is trying hard to drop out of the Top 3 of the banks with the most complaints as detailed by the CFPB (below).
Finally, over time, the distinction between checking, savings, money markets and other similar accounts will be eroded and more banks will offer an omnibus account relationship. Large banks like Chase are likely preparing for this eventuality in order to streamline operations and understanding.
Should Your Bank Do This?
The answer is probably. CenterState still charges a transfer fee as we feel this is a convenience fee that helps the customer that didn’t care or have the time to affect a transfer themselves. That said, we continue to review our fees and make adjustments as the market and conditions warrant.
While all banks want to generate more fees, doing so on overdraft-related fees will continue to be difficult and a transfer fee sticks out. For the average bank, usually 8% of customers generate 75% of all overdraft fees so this line of non-interest income comes on the bank of surprisingly few customers
Creating an omnibus account or at least an account that allows free transfers will likely be the future of cash management that more and more banks will move to. The next time you review fees and products, take a look at your overdraft transfer fee and see if it strategically makes sense.
Submitted by Chris Nichols on April 19, 2016