Major Investigation Could Snuff $31.6 Billion Business for Banks
U.S. banks can’t complain they had no warning. The fact that the Consumer Financial Protection Bureau named its Washington 2011 summer softball league team ‘The Overdrafts’ should have been some clue that the Bureau had increased scrutiny of bank practices relating to overdrawn checking accounts.
The agency is implementing a review of banks’ marketing practices, including electronic and printed marketing materials and customer service scripts that lead a customer to opt-in to overdraft protection programs. The thrust of the investigation will be on whether these practices and materials could be confusing for the average customer. Reportedly, banks’ charges for the facility, which could be $35 per overdraft at the larger banks, are also under the lens. Community banks and credit unions charge $25 per overdraft instance.
A customer enrolled in overdraft customer protection may write a check or place a debit that could cause his checking account balance to become negative, or “overdrawn.” However, the bank would honor the payment subject to a charge, as mentioned above.
Nine banks are being covered by the Bureau’s scrutiny, including JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC). Regional banks under scrutiny include U.S. Bancorp (NASDAQ:STBA), Regions Financial Corp. (NYSE:RF), and PNC Financial Services Group (NYSE:PNC).
Initially the Bureau had focused its attention on mortgages and payment cards. “We want to work with the other agencies to develop, as much as possible, common guidance on this,” Bureau Director Richard Cordray said. “We intend and expect to have an action plan on it by the end of the year.”
Tightened rules in this area could severely affect banks’ revenues. According to research firm Moebs Services, bank customers paid $31.6 billion in overdraft charges in 2011. Greg McBride, senior analyst with Bankrate.com, said, “The economics of the checking account become vastly different without that overdraft income.” He said banks may raise fees on basic checking accounts to compensate for loss of revenue on overdraft charges.