As the financial industry waits for the Consumer Financial Protection Bureau (CFPB) to make some kind of determination about banking and overdraft protection, banks and credit unions have been taking a hard look at their non-interest income strategies, especially as it relates to overdraft protection. And as lending rates remain low and lending revenue stays at historic lows, more banks are seeing the value of non-interest income, and they are looking for new ways to protect fee revenue.
When you think about it, overdraft fees, or even fees in general, are not inherently evil. In fact, many consumers actually rely on fee-based services such as overdraft protection, and customers and bankers are really both seeing benefits.
First, let’s consider how important non-interest income has become to financial institutions. Recently, a report from the Pittsburgh Tribune-Review reported that PNC, the region’s largest bank, earned $4.2 billion in fee income in the first three quarters of 2015. That’s an increase of $333 million over the same period in 2013. Most of that fee revenue comes from credit cards, followed by asset management, corporate services, then mortgages. PNC hopes to increase revenue by at much as $1 billion in the next three to five years, and most of that revenue is going to come from non-interest income.
Much of the anticipated growth is likely to come from additional banking services. As we continue to research fee trends to support our new FeeBuilder retail deposit fees database, we are seeing more banks using fees as an incentive to promote relationship banking. Although industry pundits argue that free checking is a thing of the past, you actually can get free checking with it’s bundled with other products such as credit cards, credit protection, savings, money markets, CDs, etc. The service fees for banking bundles are lower than for a la carte services, and for consumer who benefit from those relationship bundles, they will save money on fees at the same time banks or credit unions increase share of wallet, and revenue.
This brings us to the second point, are fees really bad for consumers? The CFPB is going after overdraft fees claiming they are a form of predatory lending and that customers are hit with unanticipated fees that they shouldn’t have to pay. The research actually shows that consumers benefit from overdraft protection, and they actually use their overdraft as a financial loan when they are short on cash for emergencies.
As pointed out in a guest editorial in American Banker, the CFPB is assuming that bank customers are ill-informed and that overdraft fees are charged without their consent, or at least without their complete understanding of the rules of overdraft protection. The assumption is that consumers want to avoid overdrafts. In fact, research shows that consumers are quite aware of the rules of overdraft protection and rely on overdraft to cover emergencies like medical costs or car repairs.
Having overdraft protection can be invaluable for customers, particularly middle class customers who have been feeling the economic squeeze of the past few years and are low on cash reserves. Using an overdraft for a fee is faster and easier than having to apply for an emergency loan or line of credit, and most of the time overdraft is needed to address a cash flow problem, not for a major financial commitment. For many consumers, overdraft is a cost-effective alterative to a cash shortfall, and bank customers know the fees and are willing to pay for the benefits of overdraft protection.
When they are structured correctly, fees on financial services can be a win-win for both banks and consumers. Banks are increasingly relying on non-interest income for revenue, and consumers understand that they have to pay for services that give them value. As long as the banking industry maintains transparency about fees and consumers understand the value of what they receive in return, then fees should continue to be a growing source of income that can actually promote customer satisfaction.
Have You Heard About FeeBuilder?
Deposit fees make up as much as 70 percent of fee income for many banks, and fee income is sensitive to market rates but few banks review them more than once a year. Our new FeeBuilder product is the first national retail deposit fees database to help you find new fee revenue you are overlooking:
- Find alternatives to Overdraft fees
- Evaluate early withdrawal as a means or retaining deposits
- Reevaluate minimum balances and increase relationships and share of wallet
- Find new fee revenue in debit and money market accounts
- Benchmark your fee strategy against your markets or competitors
FeeBuilder is the only tool that gives you TODAY’S FEES TODAY! Get a free demonstration.