The U.S. Consumer Financial Protection Bureau issued new guidelines for prepaid cards last week, and is expected to produce a similar set of guidelines for for bank consumer credit services such as overdraft protection in early 2015. A November 20th report from equity research analyst firm Sterne Agee focuses on the issue of the CFPB’s new rules on overdraft fees and the potential impact on U. S. banks.

overdraft rules  Overdraft Fees

Matthew Kelley and the Sterne Agee team explain the importance of overdraft fees in the introduction of the report. “In this report, we review these new rules and then examine the deposit service fee data for U.S. banks and think about who could be at risk when the CFPB tackles this issue more specifically for banks next year. Given that OD represents 5% of revenue for the industry, the potential for adverse regulatory changes needs to be understood and monitored closely.”

overdraft rules

Overdraft fees are big business for U.S. banks

overdraft rules

The SA analysts point out that industry data shows that overdraft and NSF fees represent more than 5% of revenue at U.S. banks on average. Moreover, because of lost income from regulatory changes such as Reg. E in 2009 and the Durbin amendment in 2011, banks have upped overdraft fees to make back these lost revenues. In fact, overdraft fees now represent 40% and 80% of total fees on consumer checking accounts.

overdraft rules

Of note (and concern to the CFPB), there is a relatively small group of customers who overdraft frequently and end up paying significant fees. This typically ends up with bank accounts being closed for unpaid overdraft balances and consumers eventually being shut out of the traditional banking system.

overdraft rules

Overdraft Fees – rules likely to change

The CFPB’s new rules for prepaid cards included a rule requiring full CARD Act protections and Ability to Pay rules for prepaid cards. This means that total fees on credit products may exceed 25% of the credit limit.

Kelley et al believe that overdraft revenue on prepaid cards will come under pressure as a result of the new CFPB regulations. Given that traditional bank overdraft schedules are on average three times more expensive than prepaid/online bank fees, banks are likely to take a significant hit to revenue if/when new OD regs are applied to them.

overdraft rules

Furthermore, according to a recent Federal Reserve Bank report, the CFPB is still worried about “consumers’ ability to anticipate and avoid ODs and the fact that a small but significant segment of consumers continue to incur a large number of ODs.”

Overdraft Fees – Banks with large deposit service fee income

overdraft rules

The Sterne Agee report also highlights a number of U.S. banks with large deposit service fee income and who are therefore at most risk of new overdraft rules. The analysts point out that a 20% reduction in OD fees would cut EPS by 5% on average among this group.

Super Regional Banks

– Regions Financial Corp (NYSE:RF), Toronto-Dominion Bank (NYSE:TD), Citizens Financial Group Inc (NYSE:CFG), Fifth Third Bancorp (NASDAQ:FITB) and Huntington Bancshares Incorporated (NASDAQ:HBAN)

Regional Banks

– International Bancshares Corp (NASDAQ:IBOC), TCF Financial Corporation (NYSE:TCB), Popular Inc (NASDAQ:BPOP), UMB Financial Corporation (NASDAQ:UMBF), First Horizon National Corporation (NYSE:FHN)

Community Banks

– Capital City Bank Group, Inc. (NASDAQ:CCBG), MainSource Financial Group Inc. (NASDAQ:MSFG), City Holding Company (NASDAQ:CHCO), Palmetto Bancshares Inc (NASDAQ:PLMT), The Bank of Kentucky Financial Corp (NASDAQ:BKYF)