Overdraft fee income for banks ends 2020 with mixed resilience
- Overdraft fee income rebounded from pandemic lows.
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Overdraft fees collected by US banks rebounded in the second half of 2020 after falling at the start of the pandemic, as reported by S&P Global Market Intelligence.
Representing 64% of all service charges on consumer deposits, they are up 64% from second quarter 2020 lows to $ 2.3 billion in the fourth quarter. This is a significant improvement for banks, but total overdraft fees remain 24% lower than they were in Q4 2019, and industry headwinds do not indicate whether they will ever return to their pre-pandemic levels.
Many U.S. banks suspended overdraft fees early in the pandemic, and government relief efforts have exacerbated the loss of commission income across the industry. Among other aid initiatives, banks have temporarily suspended service charges on consumer deposit accounts, including overdraft charges.
The government also intervened to to help-provide stimulus checks and impose a moratorium on evictions, forbearance and utility payments. The cumulative effect of these relief efforts has probably dampened the
and kept them from exceeding their account balance. But it lost its power as the pandemic continued to rise and fall, the banks survey their temporary restrictions and the impact of government interventions faded, leading to a rebound in overdraft fees towards the end of the year.
Banks big and small alike need to take into account that fees are unlikely to rise to pre-pandemic levels. Insider Information takes a closer look at how each group will be affected by the change:
- Big banks: Large banks are less dependent on revenue from service fees and could take advantage of this change to encourage customers to use their personal finance management (PFM) tools. Several banks are already actively discouraging overdraft fees and offering consumers low dollar lending products as a more affordable alternative: US Bank began the transition in 2018 with the introduction of its small dollar loan product, and Bank of America currently offers emergency liquidity to customers for a fee of $ 5, as opposed to its typical Overdraft fee of $ 35. Instead of reverting to their pre-pandemic standard, banks should integrate their new overdraft avoidance initiatives into a larger PFM platform aimed at improving financial health.
- Small banks: Revenues from service charges such as overdrafts are crucial to the business models of small banks. Given that they rely on this practice, it is unlikely that these banks were able to suspend overdraft fees like their larger counterparts, which means the important Specimens service charges may have been motivated by better funded customers. And the next stimulus package, designed as a gateway to recovery, could be more painful for small banks so dependent on overdraft fees. To distinguish themselves from an economic model centered on overdrafts, regional banks could adopt liquidity management solutions similar to those offered by neobanks. Running and Carillon, for example, introduced products such as an advance paycheck function that reduces the prohibitive costs that are common in banks.
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