You might answer, 'Yes’ if you saw the headline, "CFPB Urges Banks to Ditch Overdraft Accounts," from an American Banker article published Feb 3, 2016.
However, if you read the entire article, you found that The Consumer Financial Protection Bureau (CFPB) director Richard Cordray was merely asking financial institutions—in a letter he sent to the nation's 25 largest retail banks—to consider providing products for consumers who cannot obtain checking services, and to "lower the bar" when it comes to screening them for those products.
Mr. Cordray did not say that financial institutions should get rid of overdraft services. What he did say: "We are concerned that some people are being inappropriately sidelined by two things: … the lack of account options that fit their financial needs and situations … [and] inaccurate information used to screen some potential customers." Regarding the former concern, overdraft privilege is just one way financial institutions currently meet those needs, especially when it comes to short-term liquidity.
The CFPB, in its quest to render a decision, is analyzing overdraft data provided by the call reports of banks with more than $1B in assets, as well as anonymized bank data provided by a number of core processors. What they are likely to find—and what BSG Financial Group has known for years—are the following truths:
- A very small percentage of Americans overdraft each year; in fact, on average, it is approximately only 25% of personal checking accounts that show overdraft occurrences.
- Counter to what many consumer advocates and some media say, it is not the poor who overdraft the most. People from every economic strata may experience overdrafts from time-to-time, but the bulk of overdraft items originate from those accountholders who deposit money into their accounts frequently and in higher dollar amounts than those who overdraft infrequently. Said differently: the frequent 'overdrafters' are people who are convenience-driven and can afford this type of poor fiscal behavior.
- Overdraft privilege is but one alternative Americans use to satisfy their short-term liquidity needs. The majority of consumers use credit cards. Some look to payday lenders. Still others go to pawn shops. So, if even a handful of consumers need this service, shouldn't we strive to offer a solution and honor their overdraft items as long as they have the ability to repay?
- The majority of debit card transactions that trigger an overdraft fee occur while consumers are buying necessities in grocery stores and at gas stations, NOT in coffee shops, as some in the media would have you believe.
- Banks and credit unions assess overdraft fees not as a punishment, but as a way to cover the cost of providing the service to consumers. Overdraft protection allows millions of consumers to pay their mortgage, rent and insurance payments, purchase food and tend to their medical needs. Financial institutions assume risk in providing this service and charge off millions of dollars per year in losses when consumers do not repay their overdrawn balances. It is perfectly appropriate to charge a fee for assuming this risk and providing the service.
- And finally, revenue from overdraft fees is extremely important to financial institutions in order to fund the technology and other services accountholders demand, such as online banking, mobile access, etc.
How will the CFPB answer the question about the future of overdraft privilege?
Mr. Cordray has said on multiple occasions that the CFPB is not looking to do away with overdraft services. Instead, it appears the agency is leaning toward only minor changes, including new, 'more transparent' disclosures and changes to posting order (see this June 2015 Bloomberg news article). Regardless, if a decision is rendered in 2016, it is unlikely any rulemaking would become effective until mid-2017, and probably beyond.
From our perspective, overdraft privilege is and will continue to be vital to a financial institution's accountholders and its bottom line.
So is overdraft privilege is dead? Our answer is a resounding 'No!'