As was reported earlier this week, the Consumer Financial Protection Bureau (CFPB) has published a report on overdraft fees. These usurious fees generate billions on revenue for traditional banks. Almost like a drug addict, old banks struggle to eliminate these fees that end up harming the people that need the most support. Overdraft fees frequently trap users while making small transactions.
The CFPB reported that non-sufficient funds (NSF) revenue reached an estimated $15.47 billion in 2019, with most of this revenue accruing to the biggest banks in the US.
CFPB Director Rohit Chopra hosted a press call on the overdraft fee problem stating he has asked the CFPB’s bank examiners to prioritize examinations of banks that are heavily reliant on overdraft charges.
“Financial institutions that have a higher share of frequent overdrafters or a higher average fee burden for overdrafting should expect us to be paying them close supervisory attention. Ultimately, we plan to inform institutions on where they stand relative to their peers with overdraft. We believe sharing that information will increase transparency and help against the race to the bottom we have seen in this market.”
Chopra went on to point to technology, open banking, as an eventual solution to the banking fee trap.
“… the CFPB will be looking to harness technology in ways that give American families the power to more easily fire poor-performing banks. We can only accrue the benefits of competition if customers can vote with their feet. Unfortunately, switching bank accounts isn’t easy. It involves new account numbers, new debit cards, updating direct deposit, updating auto-debits, and much more. If America can shift to an open banking infrastructure, it will be harder for banks to trap customers into an account for the purpose of fee harvesting.”
Open banking can help drive competition in the banking sector removing intrinsic friction enabling consumers to jettison poorly operated banks that use heft fees as a crutch for survival.
An executive from GoCardless emailed CI and noted that Fintechs in the US are already taking necessary steps towards making open banking a reality, adding that 2022 could be the year of the great bank opening.
Vanni Parmeggiani, Director, Open Banking & Real-Time Payments, shared:
“The CFPB’s remarks this week prove that open banking is slowly but surely maturing in the US. We saw foreshadowing of this with Biden’s executive order this summer to encourage competition in the financial industry, and Chopra’s comments show that the concept as a whole is gaining momentum. As regulators continue pushing in this direction, we expect that 2022 could be the year of the great bank opening — especially as the difference in pace between the US and other countries becomes more obvious.”
While big banks may be the biggest offenders there is some good news.
Capital One, the 6th largest bank in the US, announced this week it will completely eliminate all overdraft fees and non-sufficient fund (NSF) fees for its consumer banking customers.
Richard Fairbank, Capital One’s Founder and CEO, said that overdraft protection is a valuable and convenient feature and they are excited to offer this service for free.
Beyond Capital One, some Fintechs, including neobanks and digital banks are already ahead of this game.
For example, LendingClub Bank, a fully chartered digital bank, provides overdraft protection along with all other banking services.
It is probably just a matter of time before all old banks catch up and eliminate the NSF trap but consumers would be better served to leave them now and seek out less costly, superior banking services.