As Washington targets overdraft, community banks remain customer-focused

Officials in Washington have in recent months increased their focus on overdraft programs and policies. With community banks already subject to strict overdraft regulations and offering overdraft services designed to meet the demands of their customers, ICBA and community bankers are fully engaged in the debate.

Washington Focus

Policymakers’ renewed focus on overdraft services has been led by the Consumer Financial Protection Bureau, which has issued several reports and blog posts targeting “exploitative junk fees.”

While a December 2021 CFPB report found overdraft revenues were down significantly in 2020 and community banks charge lower overdraft fees than larger institutions, the agency pledged to “restore meaningful competition to this market.”

This push has been taken up by other officials. Acting Comptroller of the Currency Michael Hsu has said the overdraft reform outlook is “promising,” an FDIC Consumer News article spotlights depositors’ overdraft options, and a House Financial Services subcommittee hearing on “the end of overdraft fees” is set for March 31.

Established Overdraft Framework

Notwithstanding such attention, community bankers are well educated on overdraft regulations and their compliance obligations. Community banks have long met their compliance obligations laid out by federal and state laws and regulations.

For instance, federal law bars banks from charging fees for ATM and one-time debit card transactions that overdraw an account, unless the customer affirmatively consents or opts into the protection. Customers may opt out of these programs at any time.

With these restrictions in place, many consumers continue to seek overdraft services due to the convenience and protection they offer.

Customer Demand and Service

Overdraft services can be a lifeline, with consumers looking to avoid fallout from missed or late payments for their mortgage, rent, car insurance, medicines, and other critical needs. Further, community bank overdraft programs offer protection against the domino effect of mounting merchant-related fees related to these transactions.

As ICBA Chairman Brad Bolton recently told the Northeast Mississippi Daily Journal, overdraft programs allow bank customers to pay for necessary expenses without turning to more costly loans.

"The unfortunate reality is that many consumers get stretched thin financially, and they may need to bridge a gap between the time a bill is due and the next payday,” said Bolton, president, CEO, and senior lender of Community Spirit Bank in Red Bay, Ala. Overdraft programs help consumers “get necessary funds without the necessity of a full loan or pushing them to the title pawn industry, which is exactly what will occur if programs like this that benefit the consumer are eliminated.”

Consumer Safeguards and Communication

Community Spirit Bank and other community banks offer myriad solutions to help consumers avoid overdraft situations in the first place. These include:

• Phone, text, and email alerts to depositors on their account status, including low balances, large purchases and withdrawals, and unusual activity.
• Linking a customer’s checking account to another account for overdraft protection.
• Small-dollar loans, lines of credit, and deposit advances.
• Requiring customers to affirmatively opt in to overdraft services and allowing them to opt out.
• Providing customers with a grace period before charging overdraft fees or waiving them altogether.

With consumers able to opt into and out of overdraft protection and choose from so many solutions to access the funds they need, overdraft fees are like any service fee—paid by customers for the convenience they provide. Whereas community banks are relationship bankers whose banking practices seek to preserve long-term customer relationships, the largest, transaction-based banks that are eliminating overdraft fees will undoubtedly add new fees elsewhere to recoup the revenue.

Community banks rely on positive and trusted long-term relationships with their customers, so keeping customers informed of their overdraft services and options is in the best interest of both consumers and banks.

So, while there has been increased attention and calls for market adjustments in how overdraft services are delivered, community banks are already working to ensure their customers are getting the services they want and need.

Policy Outlook

Through it all, ICBA will continue to remind policymakers that community banks already meet stringent overdraft restrictions, tailor their services to their customers’ needs, and are relationship bankers who only benefit when their customers do as well.