Regulation E, the
provision requiring US consumers to opt-in before lenders can
extend or continue to provide fee-based overdraft services for ATM
and one-time debit card transactions, is now fully in force. As
Charles Davis reports, the provision has caused an overhaul of US
retail banks’ pricing strategies.
Go deeper with GlobalData
US banks continue to
revisit their pricing strategies, three months after the rollout of
the Regulation E’s (Reg E) new overdraft guidelines. A number of
strategies are emerging, as a consequence of higher-than-expected
opt-in rates by consumers.
When the new rules were
announced, a number of banks protested loudly, arguing that the
lost revenue would be impossible to make up as massive numbers of
customers would choose to opt out of overdraft
protection.
Yet nearly two months after
the deadline for banks to stop supplying overdraft coverage to
customers who did not give their permission, the overdraft is alive
and well, and a number of banks have adjusted by introducing
product line tweaks to wring some revenue from their base checking
product.
This much is clear: customer
demand for overdraft remains a force in US retail
banking.
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By GlobalDataUS consultancy Moebs Services
has produced the first systemic look at the effects of the new Reg
E overdraft rules. The data, gathered from a survey of almost 2,300
banks, shows opt-in rates ranging from 60 to 80%, with nearly all
frequent overdrafters – that is, those with 10 overdrafts or more a
year – giving their consent.
Thanks to such high rates of
consumer adoption, Moebs predicted that overdraft revenue for 2010
will come in at $35.4bn, slightly less than $2bn below its 2009
peak. In fact, the Moebs predicts that overdraft income will reach
a new high in 2011.
“We expect, with the
regulation requiring opt-in for debit cards and ATMs coming in,
third quarter revenue will fall again, but this will recover by the
same amount in the fourth quarter,” says Michael Moebs, CEO of
Moebs Services.
“We also estimate that
overdraft revenue will increase in 2011 to $38.0bn and be the
highest ever for the industry.”
According to Moebs, about
$2bn of revenue was lost in 2009 in the fourth quarter, when banks
and credit unions started to implement their own floors and
ceilings on overdrafts, in response to consumer and congressional
complaints. Another $2.3bn in revenue was lost during the first
quarter of 2010 due to the introduction of opt-in regulations by
the Federal Reserve and changes made by depositories. Finally, it
cost banks and credit unions about $2bn in operational costs and
training to implement the opt-in regulation and their own changes
to overdraft services.
“When you add the lost
revenue and the additional cost of the new overdraft regulations,
it amounts to about $6.3bn erosion into profitability for all banks
and credit unions,” Moebs said.
Interestingly, the distinct
minority of banks that reduced the cost of their overdraft services
with the revision of Reg E have maintained their overdraft revenue
better than those that did not.
Other US banks have begun to
adjust their checking products to respond to the regulations.
KeyCorp launched a new checking account, Key Coverage Checking
(KCC), that offers a variety of solutions based on a customer’s
banking needs, including flexible overdraft fee options and ID
theft protection.
KCC includes the waiver of
the first two overdraft or return item fees assessed each month. In
addition, KeyCorp assesses no overdraft fee if an account is
overdrawn by $10 or less, based on the end-of-day
balance.
A reduced overdraft fee of
$18 is assessed if the account has a negative end-of-day balance of
$10.01 to $100. If the account remains overdrawn for five or more
consecutive business days, a recurring overdraft fee is charged.
KCC, a non-interest bearing checking account, is available for a
$10 monthly fee.
For many banks, the solution
has been rather straightforward: introduce new fees on checking
accounts that previously had none. Bank of America, Citigroup and a
host of other major US banks have added new fees to compensate for
the loss of overdraft income, US Bank is taking the opposite
approach, opting out of instituting new fees in a calculated bet
that deposit inflows can overcome the loss in fee income. The bank
estimates new federal restrictions on overdraft fees and credit
cards could cost the bank $690m to $730m a year.
So far, so good: its deposits
rose 10% in the third quarter over a year earlier, outperforming
many of its rivals; third-quarter profit rose 51% to
$908m.
Wells Fargo has taken a
middle-of-the-road approach, eliminating free checking for new
customers with a new checking-account product called Value Checking
that includes a $5 monthly maintenance fee. To soften the blow,
Wells Fargo waives the fee for people who agree to have their
paychecks deposited directly to the bank or for account holders who
maintain average daily balances of $1,500.
Wells Fargo has managed to
not only retain its existing checking customers, but enjoyed 9%
deposit growth in the third quarter and a 19% profit
gain.
The Fed is expected to issue the new debit interchange
rules in December, in accordance with the Durbin Amendment’s
requirement that the Fed create regulations that will set policy
for establishing “reasonable and proportional” debit card
interchange rates, effective in July 2011.
