Most banks don't mind making a quick buck off careless or cash-strapped customers who trigger an overdraft by spending more than they have available in their checking account. But some banks seem to have based their business model on overdrafts, earning more than 40% of their non-interest income from customer overdrafts.
SNL Financial, a financial analysis firm, looked at regulatory filings from the nation’s banks and found the top 20 banks that made the highest dollar amounts on service fees for consumer checking accounts in the 2nd quarter of 2015.
Most of the top 20 are there, in part, because they're the biggest banks in the nation; think Bank of America, which topped the list with $724 million in service charges (quarterly, not annually!), or JPMorgan Chase, which came in 2nd with $692 million in fees.
But a few smaller banks made the list because they still manage to charge a crazy amount of fees to their customers, especially overdraft fees.
Woodforest National Bank, with assets of $4.44 billion, makes more in overdrafts than Citibank, which is roughly 300 times its size. Tiny First National Bank Texas, with assets of $1.34 billion, charges more in overdrafts than Key Bank, which is 69 times its size.
To get a sense of just how much these banks tie their business models around collecting overdrafts, I looked at their most recent call reports -- financial information banks are required to file with regulators -- from the 2nd quarter of this year. First National Bank Texas and Woodforest National Bank each make about 42% of their non-interest income from overdrafts. Compare that with Bank of America, not exactly known for its reluctance to slap fees on customers, which makes just 5.6% of its non-interest income off of overdrafts.
In fact, for every $1 Woodforest holds in consumer deposits, it pulls in more than 3 cents in overdraft fees. First National Bank Texas is even crazier, pulling in more than 5 cents for every dollar it holds in consumer deposits. By comparison, Bank of America looks like a champion of the people, pulling in just 0.13 cents in overdraft fees for every $1 in deposits.
Neither bank could be reached for comment.
The Wal-Mart connection
So why are these small, relatively little-known banks rolling in overdraft fees? After all, they don't really charge an unreasonable amount per overdraft compared with their peers. The national average for overdrafts is $32.74; Woodforest charges $29 per overdrafted item and First National Bank Texas charges $34. Their terms for overdraft fees and reordering transactions, a typical source of overdraft abuses, look pretty standard to me.
Instead, it comes down to location, location, location. Both banks have lots of branches within Wal-Mart Supercenters and aggressively solicit customers within those stores. Many of these customers knowingly overdraft their accounts, using it as a de facto payday lending program, and the banks are more than happy to accommodate them.
In a way, it's no surprise that Wal-Mart and overdraft-happy banks are finding synergy. Checking account holders making $50,000 or less a year are more than twice as likely to be high-frequency overdrafters as account holders making $100,000 or more, according to a study by the Pew Charitable Trusts. So Wal-Mart's working-class clientele is fertile ground for anyone looking to profit on overdraft.
However, banks that continue to base their business models on charging overdrafts that can have lasting, negative consequences for consumers may eventually face the wrath of the Consumer Financial Protection Bureau. The agency fined Regions Bank earlier this year over dodgy overdraft practices, and a new CFPB rule on overdraft is expected sometime in the near future.
What do you think? Should the CFPB crack down on overdraft, or are overdraft-happy banks providing a needed service people are happy to have?
Follow me on Twitter: @claesbell.