Banks should fear the inquiry into overdraft charges

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The Consumer Financial Protection Bureau said recently it plans to look at overdraft fees beyond ATM transactions and debit cards.

The inquiry is said to be driven by the regulator's need to understand the issues a bit more. It is not at this point an enforcement-oriented exercise, which is good news. But the fact that a spotlight will be held up to overdraft fees once again will likely make some banks uncomfortable. Recall that Dodd-Frank required a modification to Regulation E that forced banks to offer consumers the ability to opt-in to debit card overdraft protection programs, which in the past were fabulously profitable, as banks ordered transactions to maximize revenue.

For banks, the loss of revenue has been palpable.  TheStreet.com, notes that,  "Precise estimates of revenue loss due to the overdraft rules are unavailable. But most of the big banks, with the exception of Citigroup due to its higher share of foreign deposits, saw a big drop in service charges on deposits in the fourth quarter of 2010, the first time the overdraft rules were in full effect. Most of the service charges come from overdraft fees."

Bank of America experienced a 36 percent drop in service charges on deposit accounts in the fourth quarter of 2010 to $1.28 billion. At JPMorgan, such services charges fell 18 percent. At Wells Fargo, such charges declined 27 percent to $1.03 billion.

The fear of course is that regulators at some point in the future decide to expand the opt-in requirement to transactions beyond debit cards, say for regular checking accounts, where check transactions are still ordered to maximize profits. That could really crimp revenues even more.

For more:
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