By Ray Birch
LAKE FOREST, Ill.—The nation’s second-largest bank, the $2.16-trillion Bank of America, announced it has lowered its OD fee to $10 per transaction from $35 in a move one expert believes will be followed by even more financial institutions either dropping or eliminating their overdraft charges.
The movement began in 2020 when Ally Bank was the first to eliminate the fee and has since been followed by a number of other banks and credit unions.
“Brian Moynihan, CEO of BofA, is making a lot of his customers who overdraw very happy,” said Michael Moebs, economist and CEO of Moebs $ervices. “In addition, Moynihan’s bank has dropped its NSF fee to zero from $35.”
While Moebs noted customers and new customers of BofA will be happy, he said investors initially may have a different take, as he noted the move could lead the mega-bank to suffer a loss in net revenue.
Moebs pointed out BofA’s OD and NSF fees were 16% higher than the median national prices, according to data from Moebs $ervices’ November 2021 survey of 3,309 depositories.
Ultimately, however, Moebs said investors may cheer the move as the bank uses the strategy to potentially grow marketshare.
“BofA’s price decline was in line with what changes were resulting from the COVID pandemic,” said Moebs. “This is a brilliant move by CEO Moynihan. Moynihan is putting BofA’s stake in the ground and telling all depositories and fintechs BofA is going to go after their checking business—especially, Wells Fargo, Chase and Chime.”
In addition, BofA has lowered transfer fees from deposit and lines of credit to zero from $12 each.
“This makes it easier for customers to move money without charge,” added Moebs. “Stop-payments and return of deposited items are the same along with daily caps on fees and de minimis balances and transactions, which were lower than national medians to start.”
What’s That About a Free Lunch?
But Moebs is also cautioning that consumers should pay attention when they get “something for nothing.
“Alliant Credit Union and Ally Bank did this in 2021. Walmart countered zero OD charges by lowering their charge from $25 per transaction to $15, and BofA, now, is down to $10,” Moebs said.
Michael Moebs
Moebs asserted those FIs that drop their overdraft charge to zero won’t hold that line forever.
“Those taking the price for overdrafts and other related OD prices to zero will raise those prices eventually,” stated Moebs, who said data show the “fully absorbed” cost to do an overdraft is over $11.
He believes those Fis currently priced at $0 will eventually fall in line with Walmart at $15.
Risk Involved
“And another reason is risk. If you have risk, paying someone’s debit card but not charging avoids valuing the transaction. Every overdraft authorization or payment has value, and the prudent buyer will know to pay something or avoid the zero-price provider. My mom taught me well.”
Moebs said the pandemic has led the average American to store money in checking—which has made the accounts even bigger targets today.
“In 2018 the average checking balance was $3,754 for all checking accounts and went to $3,698 at the end of 2019, according to Moebs $ervices’ surveys,” he explained. “Near the end of 2021 these overall balances were $8,244—254.3 million Americans in 2021 held 417.9 million checking accounts. The checking accounts hold $3.2 trillion more than before COVID.”
The Winners
The challenge for all depositories and fintechs is to try and hold onto these funds, said Moebs.
“And only those who know how to price their transaction accounts like Bank of America will be the winners,” Moebs said.
As CUToday.info has reported, the overdraft dominoes have been steadily falling since Ally Bank began the movement to drop or eliminate the charges. The moves come at a time when consumer groups and Washington are zeroing in on overdrafts. As CUToday.info also reported, the nation’s largest bank, $2.87 trillion JP Morgan Chase, recently addressed overdraft charges. The mega-bank announced this year it will give customers a day grace period before charging an overdraft fee.
As CUToday.info reported here, financial institutions have begun raising their limits on overdrafts, with credit unions leading the way.