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Banking Briefing — January 17, 2022

  • Overdraft fees have been under a lot of scrutiny recently, and more banks want to show they're above this revenue source.
  • But can banks really get away with getting rid of these unpopular fees while still staying afloat?

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Banking Briefing — January 17, 2022

Tearsheet's Briefings for Outlier members give a deeper and contextual weekly look into banking, payments, blockchain, green finance, and embedded finance. Subscribe to Outlier to get full access to Tearsheet content.

In October last year, overdraft fees were reported to have reached a record high of $33.58, according to research by Bankrate. 

Still, the amount of money banks are actually bringing in through overdraft fees has been going down – that’s largely due to the pandemic, and banks waiving overdraft fees in response. 

In 2020, revenue from overdraft fees was $8.82 billion – down almost 3 billion compared to 2019, according to research from S&P global intelligence. In the first 9 months of last year, revenue from overdraft fees was around $6.13 billion.

Overdraft fees’ footprint in banks’ revenue stream may be shrinking. 

In June, digital-only bank Ally got rid of overdraft fees. In December, Capital One followed suit, becoming the biggest bank to put a stop to overdraft fees. 

The news came as the CFPB announced it’s going to be scrutinizing banks that rely heavily on overdraft fees.

Even if other banks aren’t getting rid of overdraft fees completely, they are taking steps to minimize them. Pennsylvania-based PNC, for example, has added features like low-balance alerts and a grace period to help customers avoid falling into overdraft traps. 

Bank of America is reducing overdraft fees from $35 to $10 starting May this year, while Wells Fargo will be waiving certain fees as well as giving customers a 24-hour grace period to get their balance over $0 before charging them the $35 overdraft fee.

With overdraft fees being a serious source of dough for banks since the ‘90s, the change does beg the question of how these incumbents will make up for lost revenue... 

Three questions on the future of overdraft fees with Reed Switzer, co-founder and CEO at Hopscotch, B2B payment platform for small businesses

Reed Switzer is the co-founder and CEO of Hopscotch, a B2B payment platform for small businesses. He sees the changes banks are making to their overdraft policies as a way to a) keep up with fintech competitors, and b) start their own transformation into a tech-like model.

What would it take for banks to get rid of overdraft fees altogether?

Big banks are built to extract wealth from those they serve, and overdraft fees generate billions in revenue annually. The consequences of eliminating a revenue stream of that size is a significant blocker to eliminating fees altogether. Before banks can make the jump in removing overdraft fees, they’ll need to bolster other sources of revenue like lending operations. The unfortunate reality is that this evolution will likely take several years. The net-net: big bank overdraft fees are here to stay, for now.

Do you see overdraft fees going away?

Bank of America’s decision to slash overdraft fees to $10 confirms that big banks remain dependent on fee revenue. This year, we’ll see other large banks follow suit by cutting fees by fifty, sixty, and even seventy percent. To capitalize on consumer sentiment, many smaller institutions will go a step further and eliminate fees altogether. Overdraft fees will not be as prevalent in the coming years, but the current rate of evolution suggests the oh-so-hated fees will linger until 2025.

What's your biggest takeaway from this trend popping up?

Neobanks and other digital financial platforms experienced explosive growth in 2021. These fintechs offer better perks and user experiences than traditional banks. Also, many Neobanks do not charge overdraft fees. With increased pressure to compete, traditional banks will start looking a lot more like tech companies than financial institutions.

Quote of the week

“I think wages going up is a good thing for the people who have the wages going up.
CEOs shouldn’t be crybabies about it. They should just deal with it.” Jamie Dimon, CEO of JPMorgan Chase

Banks tend to be seen as the main beneficiaries of rising inflation. That’s because as interest rates rise, so do banks’ profit margins.

But there is one area where inflation is leaving major banks in a bit of a pickle: wages.

On Friday, JPMorgan Chase posted its smallest quarterly earnings in almost two years.

CFO Jeremy Barnum confirmed in a conference call that the tight labor market means the bank has had to increase expenses to stay in the competition and appeal to the best talent. The company expects expenses to increase by around 8%, reaching $77 billion this year.

Immediately following its earnings, JPMorgan shares fell by over 6%.

Still, regarding all the pay talk, Dimon’s reaction seems to be akin to ‘c’est la vie’. If the bank wants to stay in the game in the long term, it needs to pay in the short term.

“We will be competitive in pay. If that squeezes margins a little bit for shareholders, so be it,” he told CNBC.

What we're reading

Good to know 

  • 2022 could be a promising year for challengers…in the EU and the UK, that is…(PYMNTS)
  • Challenger bank Dave’s plans after going public (American Banker)
  • is now valued at $40 billion (Bloomberg)
  • After 20 years of existing, no more global consumer banking division at Citigroup (FT)
  • "I regret that a number of my personal actions have led to difficulties for the bank and compromised my ability to represent the bank internally and externally," Chairman of Credit Suisse Antonio Horta-Osorio resigns after breaching Covid quarantine rules (BBC)

Food for thought 

  • How Gen Z could determine the future of open banking (Sifted)
  • 2021’s main takeaways in retail banking (Financial Brand)
  • Where central banks are at with their CBDC plans (Finextra)

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