The era of free U.S. bank accounts may be headed for an end, if a new political push to curb overdraft fees is successful.
Major U.S. banks including Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) said this week that they plan to limit some overdraft fees, in the first major private-sector push to rein in the charges.
These voluntary limits are likely designed to forestall regulators and legislators, who are keen on cutting the hidden fees that many consumers face in their bank accounts. Whatever banks do, many analysts see new laws and regulations as all but inevitable.
The pressure is on, and it's going to keep mounting. Fees are a lightning rod for politicians, said Jennifer Thompson, analyst at Portales Partners in New York.
Overdraft fees can provide material revenue to banks. A 2008 Federal Deposit Insurance Corp study found that these fees accounted for 6 percent of U.S. banks' operating revenue.
It's quite significant, said Philipp Schnabl, a New York University assistant finance professor.
If banks can't zap customers with hidden fees, they either cut costs or find different ways to extract revenue from depositors. One possibility is to charge customers for accounts that were previously free, such as checking accounts.
To many analysts, such a shift makes sense, because consumers will know the price of products they are using instead of facing unexpected hidden costs.
Bert Ely, an Alexandria, Virginia-based banking consultant, said he expects changes in overdraft fees to spur lower deposit account interest rates and possibly higher fees for customers used to no-fee accounts. Some banks may cut ties with unprofitable deposit customers. The changes will likely take place gradually, he added.
SOMEBODY'S GOT TO PAY FOR THIS
As U.S. banks' net income plummeted with the financial crisis in the last year, overdrafts and other deposit account service charges grew, becoming an increasingly important source of income for banks.
A political backlash has come with higher fees. The office of Sen. Christopher Dodd, chairman of the U.S. Senate Banking Committee, issued a statement saying the system has gotten completely out of whack, even if recent voluntary moves from banks were positive. Dodd, a Connecticut Democrat, is preparing legislation to curb overdraft fees.
Bank of America plans to cap the total overdraft fees a customer can be charged in a given year, waive fees for overdrafts under $10 that are covered within a 24-hour period and provide financial education for serial overdrafters.
JPMorgan will waive the fees for overdrafts less than $5. The firm's fee income has jumped 70 percent from 2008 to 2009, totaling $2.8 through the first half of 2009.
At Wells Fargo, the San Francisco-based bank is adopting a $5 or less waiver similar to JPMorgan. It will also charge no more than four overdraft fees per day, and allow customers to opt out of coverage.
But many overdrafts are for more than $5 or $10, and can trigger fees of potentially thousands per year for repeat offenders, said Bob Meara, a senior bank analyst for Celent, an industry consulting firm.
Meara compared U.S. banks' weaning themselves from overdraft fees to Wal-Mart Stores Inc's (WMT.N) decision in the early 1990s to eliminate coupons and item-specific sales, allowing the retailer to focus instead on consistently lower prices. Wal-Mart brought its largest supplier, Procter & Gamble Co (PG.N), in on the change.
Wal-Mart and Procter & Gamble took it on the chin for a few quarters, he said. But now that's the standard in the industry.
(Reporting by Joe Rauch; additional reporting by Elinor Comlay, editing by Matthew Lewis)