“Overdraft fees are one of the biggest risks to the banking industry under a Biden presidency,” said Nathan Dean, senior analyst at Bloomberg Intelligence.
“There will be real pressure from progressives to get tough on banks. This is the easiest way to do that,” said Dean.
Cowen Washington Research Group warned clients last week that a Biden win will likely result in restrictions on how often banks can charge overdraft fees and other limitations.
“If Donald Trump wins, we see no risk to overdraft fees,” Jaret Seiberg, policy analyst at Cowen, wrote in the note to clients.
Biden has not explicitly promised to take action on overdraft fees. And the Biden campaign did not respond to a request for comment. But if he wins the election and pushes to eliminate overdraft fees, it would serve as another example of how a win for Democrats in November could hurt banks. Not only is there the specter of more regulation, but Biden has called for unwinding Trump’s corporate tax cuts.
9% of accounts pay 79% of overdraft fees
Each year, banks haul in more than $11 billion worth of overdraft and related fees when customer accounts go negative, according to FDIC stats on banks with more than $1 billion of assets.
These fees represent about 5% of non-interest income at banks, according to Cowen. And that doesn’t include the overdraft fees collected by thousands of small banks and credit unions — a total that likely rivals or even exceeds the $11 billion from bigger banks.
While overdraft fees pad the bottom lines of banks, they can burden customers, especially lower-income households.
Consider that just 9% of all accounts pay for a staggering 79% of all overdraft and non-sufficient fund fees, according to a 2017 report by the Consumer Financial Protection Bureau.
And these “frequent overdrafters” tend to have lower credit scores and be more “credit constrained” than other bank customers, the CFPB report said.
“The most vulnerable customers are getting absolutely hammered,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending.
The Center for Responsible Lending cited a laundry list of “unreasonable” common practices, including high fees (typically $35/per overdraft transaction), multiple fees per day, sustained fees until accounts are brought back into balance and “often manipulative” practices involving deposit clearing.
Still, overdraft fees are among the most complained-about bank practices at the CFPB, the financial watchdog created by the 2010 Dodd-Frank law.
A Truist Bank customer from Florida cited a medical hardship caused by the pandemic.
“My partner lost his job due to Covid,” the customer said. “As a result of the change in income my account was over drafted and subsequently closed.”
Mike Townsend, a spokesman at the American Bankers Association, said that banks offer customers multiple tools to prevent overdrawing their accounts, including text alerts about low balances and online account monitoring.
“As always, banks are committed to ensuring their customers are able to understand and make informed choices about their overdraft options,” Townsend said in a statement.
How regulators could crack down
If Biden wins the White House, he would likely move swiftly to replace CFPB Director Kathy Kraninger with a Democrat who would be more sympathetic to calls to crack down on bank fees.
“The CFPB has teeth, no matter who the director is,” Borné said. “It’s long overdue to do something about abusive overdraft practices.”
Cowen thinks Biden-appointed regulators are likely to take several steps, including preventing banks from charging more than one overdraft fee per day, requiring lenders to process transactions in a way that minimizes overdraft fees and making banks waive overdraft fees if a customer is waiting for a deposit to clear. There is also talk of forcing banks to lower the amount of the fee, especially for relatively small overdrafts.
Democrats in Congress have also proposed giving customers the flexibility to overpay overdrafts over time, instead of the very next deposit.
“This is to avoid trapping a consumer in a negative cycle,” Cowen’s Seiberg said, “where the repaying of a prior overdraft triggers a new overdraft.”