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A White House press release titled Minutes of the third meeting of the White House Competition Council reported that:
The Consumer Financial Protection Bureau has taken action to address the nearly $30 billion in ‘junk fees’ — such as late fees, overdraft fees, NSF check fees — that Americans pay every year. Spurred by CFPB actions, three-quarters of the nation’s 20 largest banks are getting rid of NSF check fees. The overall level of overdraft fees is expected to fall by $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 their cash suggests that it might not be good news for Americans – not what they expect from the banks they do business with.
The fallacy of hidden fees
Politicians (and other critics of the banking industry) love to criticize banks for the so-called “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 Xers, and nearly nine in 10 Boomers, told Cornerstone that their top checking account providers properly disclose their fees.
This conclusion is ignored by the press and ignored by the CFPB, which has worked for years to impose additional disclosure requirements on banks, assuming that banks must withhold information. The survey data does not support this thought.
Many Americans Think Bank Fees Are Fair
And despite all the press and attention to checking account fees, three-quarters of Americans think their main checking account provider’s fees are fair, ranging from six out of 10 Gen Zers to eight out of 10 Baby Boomers.
Only 27% of consumers believe that NSF (insufficient funds) fees – which are charged when the bank does not pay for an item for the customer – and overdraft fees, which are paid when the bank Is pay for an item for the customer, are not fair.
This does not mean, however, that others think they are righteous. Four in 10 Americans believe the NSF check and overdraft fees charged by their banks are fair, but a third say they don’t know or are unsure.
Listening to the White House, however, one would think that all Americans are railing against these charges. which are somehow hidden.
Attacking “junk fees” doesn’t solve the real problem
Reducing, if not eliminating, overdraft fees and NSF fees won’t solve the real problem Americans face: 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 .
There are many reasons for this, including large unforeseen expenses, unexpected shortfalls, overspending, and unemployment.
What are the Americans doing in the face of this liquidity problem? 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 belongings in pawnbrokers.
The real culprit and the wrong answer
It’s not “junk fees” that are hurting Americans the most, it’s inflation, interest rates and a weak economy.
The recent change in the overdraft policies of many financial institutions is good news for consumers, and actually good news for financial institutions, from a regulatory and public relations perspective, that is.
From a revenue perspective, it’s a different story, as many institutions face millions of dollars in lost fee revenue. According to Steven Simpson, Principal at Cornerstone Advisors:
“Waiving overdraft fees may seem like a big win for consumers. The problem is not so simple, however, as the consumer banking model that offers convenient branches, contact center, digital banking, debit cards, fraud protection limits, cybersecurity and access to larger amounts of cash needs income to sustain itself.
However, increasing monthly account fees is not a feasible reaction, as it will likely result in the loss of 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 cash management
To solve this problem and recoup the millions lost in fees, banks and credit unions need to transform their overdraft programs into cash management programs. These programs should:
- Be proactive and personalized. A “managed” program assigns overdraft limits based on various 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 quick. Consumers appreciate 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%, vs. 17%, 22% and 15% for 4-hour quick access loans, 24-hour regular loans or 5-day loans for line of credit applications, respectively).
- Establish a “de minimis exception”. A de minimis exception is a minimum overdraft amount below which the institution will not charge a fee. Banks can provide this exception per item or per day. This policy is a consumer-friendly practice to avoid the headline “$30 for a $3 cup of coffee” 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 the use of the overdraft service (and associated fees) when the fees exceed a given percentage of the consumer’s deposits.
- Offer a variety of credit alternatives. Banks have struggled to replace lost buy-now-pay-later (BNPL) exchanges, but the biggest problem could be the erosion of the relationship with the consumer due to other providers offering credit to the point where the consumer needs it. Banks’ liquidity management programs should offer a range of credit alternatives, including BNPL and referrals to providers who can offer small, short-term loans.