[Senate Hearing 117-624]
[From the U.S. Government Publishing Office]
S. Hrg. 117-624
EXAMINING OVERDRAFT FEES AND THEIR EFFECTS ON WORKING FAMILIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION
OF THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING WAYS TO LOWER THE EVERYDAY COSTS FOR AMERICANS AND TO ENSURE
STABILITY IN THE FINANCIAL INSTITUTIONS THAT SERVE THEM
__________
MAY 4, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-743 PDF WASHINGTON : 2024
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
______
Subcommittee on Financial Institutions and Consumer Protection
RAPHAEL G. WARNOCK, Georgia, Chair
THOM TILLIS, North Carolina, Ranking Republican Member
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana TIM SCOTT, South Carolina
MARK R. WARNER, Virginia MIKE ROUNDS, South Dakota
ELIZABETH WARREN, Massachusetts BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada CYNTHIA LUMMIS, Wyoming
CHRIS VAN HOLLEN, Maryland JERRY MORAN, Kansas
KYRSTEN SINEMA, Arizona KEVIN CRAMER, North Dakota
Max Virkus, Subcommittee Staff Director
Ryan Adams, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
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WEDNESDAY, MAY 4, 2022
Page
Opening statement of Chair Warnock............................... 1
Opening statements, comments, or prepared statements of:
Senator Tillis............................................... 3
WITNESSES
Aaron Klein, Senior Fellow in Economic Studies, Brookings
Institution.................................................... 5
Prepared statement........................................... 22
Jason Wilk, Founder and Chief Executive Officer, Dave............ 6
Prepared statement........................................... 32
Responses to written questions of:
Senator Warren........................................... 41
David Pommerehn, Senior Vice President and General Counsel,
Consumer Bankers Association................................... 8
Prepared statement........................................... 33
Additional Material Supplied for the Record
Ally Financial press release..................................... 43
Statement submitted by AFR....................................... 45
Bank of America press release.................................... 48
Statement submitted by Capital One............................... 53
Statement submitted by CFA....................................... 56
Statement submitted by Chime..................................... 62
Citi press release............................................... 64
Letter submitted by Consumer Reports............................. 66
Letter submitted by CUNA......................................... 68
Letter submitted by DoubleCheck.................................. 70
Letter submitted by Gusto........................................ 74
Statement submitted by ICBA...................................... 77
Statement submitted by NCLC...................................... 80
Statement submitted by ABA....................................... 98
(iii)
EXAMINING OVERDRAFT FEES AND THEIR EFFECTS ON WORKING FAMILIES
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WEDNESDAY, MAY 4, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Financial Institutions and Consumer
Protection,
Washington, DC.
The Subcommittee met at 2:30 p.m., via Webex and in room
538, Dirksen Senate Office Building, Hon. Raphael G. Warnock,
Chair of the Subcommittee, presiding.
OPENING STATEMENT OF CHAIR RAPHAEL G. WARNOCK
Chair Warnock. Good afternoon. This Subcommittee hearing
will come to order.
Welcome to the third hearing of the Subcommittee on
Financial Institutions and Consumer Protection this Congress.
This hearing is in a hybrid format. Our Members are in person,
but we will have witnesses testifying both in person and by
video. We are grateful for their presence.
I am honored to chair this Subcommittee and to work with
Ranking Member Thom Tillis to lower the everyday costs for
Georgians and Americans and to ensure stability in our
financial institutions that serve families, small businesses,
and communities in Georgia and all around our country, and I am
proud of our efforts to ensure that communities have equal
access to the financial resources that build an economy that
works for all Americans.
Today's hearing will examine the financial services
industry's practices and innovations around overdraft fees and
the effects these fees, or lack of fees, have on hardworking
families.
The economic turbulence of the COVID-19 pandemic has pushed
working families to the brink. Thanks in part to the relief
passed by Congress to combat the pandemic, including the
American Rescue Plan, our Nation is recovering and rebuilding.
Still, there is more Congress must do to bring financial
stability to hardworking families in Georgia and all across the
country.
And heavy overdraft fees, these onerous fees, keep people
within cycles of debt and poverty. Last December, the CFPB
released a report that many banks have a, quote, deep
dependence on overdraft fees. Some banks that make billions of
dollars per year pad their profits with billions more from
charging disproportionate fees, as much as $38 for overdrafting
just a few dollars beyond what is allowed. And so someone
swipes their card for $2 cup of coffee, as working families
work from day to day to make their lives work, and they end up
spending 40 bucks for a $2 cup of coffee.
Fees are also keeping hardworking Americans out of our
financial system, particularly those living on the edge of our
economy. One-third of unbanked households cite high fees as a
reason that they remain without a bank account.
And we know these types of fees affect people of color at a
disproportionate rate. Studies have found that, on average,
banks with branches in predominantly Black neighborhoods charge
more for overdraft services. In addition, customers who
overdraft the most throughout the year tend to have lower
income, poor credit scores, and are disproportionately Black
and Hispanic. It is a vicious cycle.
In response to the uncertainty brought on our Nation by the
pandemic, many banks moved to waive credit fees charged to
their customers, like overdraft fees and fees for nonsufficient
funds. This is in sharp contrast to how the industry responded
after the 2008 financial crisis. And I want to applaud those
banks for making the right choice to help communities, and they
have demonstrated that it is possible to make the right choice
and still be prosperous in their businesses.
Some of these same banks have now voluntarily made these
changes permanent, and every month, to their credit, we hear of
more following their peers in doing the same. That is good
news. Additionally, many fintech companies, like the one before
the Subcommittee today, are also offering innovative new
products and services to help customers avoid fees.
This is not theoretical stuff for me. I have heard from
Georgians directly about the negative effects overdrafts can
have on their lives, and overdraft fees. In the CFPB's request
for feedback on fees, one Georgian serving in our military
wrote about how technical glitches and shady business practices
by their large bank cost them money and stress even while they
were preparing to deploy to a war zone. In another comment, a
student at Georgia Tech wrote about how what little money they
had while studying for an engineering degree was being, quote,
skimmed off by these fees.
This is also personal for me. In addition to serving as a
Senator for Georgia, I am also the senior pastor of the
historic Ebenezer Baptist Church in Atlanta. My church counts
among its parishioners Georgians from every walk of life, and
we look out for each other.
As a pastor and a Senator, I see my work as grounded in
serving others and my community, and I want to extend this call
to our Nation's banks, credit unions, fintechs, and other
financial institutions. I believe Congress, and this
Subcommittee in particular, have an important role to play in
ensuring that the financial institutions that support our
communities and our small businesses and working families have
the resources, tools, and support to continue their important
work. Nevertheless, at the same time, we must hold financial
institutions accountable when they juice their profits off the
backs of struggling, vulnerable Americans and ensure that they
are not looking at these customers as easy marks to be taken
advantage of with onerous or opaque fees.
I remain focused on lowering costs for Georgians and saving
them money. Like all of my hearings, this hearing in the end is
about helping people, ordinary people, hardworking families,
and helping small businesses. As American families, small
businesses, and communities recover, we must ensure they have
the resources they need not only to survive but also to thrive.
So, welcome and thank you so very much for being here.
I will now turn to Ranking Member Tillis for his opening
statement.
OPENING STATEMENT OF SENATOR THOM TILLIS
Senator Tillis [presiding]. Thank you, Chairman Warnock,
for holding this hearing and thanks to the witnesses here in
the committee room and connecting virtually.
I have long supported the policies that ensure the United
States enjoys the healthiest and most diverse financial
services ecosystem in the world. Our current mix of globally
systemic financial institutions, superregionals, regionals,
local community banks, and credit unions, along with an
increasing number of fintechs, provide tremendous consumer
choice across a wide variety of platforms and products. The
topic of overdraft fees is no different.
The financial services industry has worked to tailor its
products and create new ones, all while responding to changes
in Government regulation, financial innovation, and obviously
the needs and preferences of the American consumer. While there
have been voices in Congress and Federal regulators advocating
for further action in this space, I believe it is clear the
financial services industry has, through the market powers of
competition and innovation, already adopted consumer-friendly
policies and products regarding overdraft.
It is critical to understand, since 2010, debit overdraft
services at point of sale ATMs can only occur after consumers
expressly opt in to be a part of the program, and not only do
consumers have to opt in to the arrangement, the data shows
that greater than 60 percent of all overdrafts occur when
consumers intentionally utilize the service. Comments by some
insinuating that financial institutions trap unaware customers
into these products, when consumers are presented with opt-in
provisions from the start and subsequent notifications
explaining they can terminate the services at any time, seem to
be unfounded.
Likewise, it is important to point out that following the
2008 financial crisis some Federal financial regulators under
the Obama administration emphasized the reliable and
countercyclical nature of overdraft revenue as an appropriate
tool for ensuring the stability of the banks' balance sheets.
Some went so far as to express the desire to see overdraft
revenue when grading banks on the well-known CAMELS rating
system. The irony that banks may now run afoul of Federal
regulators on overdraft, after being encouraged to seek it out
by many of the same regulators a little more than a decade ago,
is not lost on me.
Despite these headwinds, the financial services industry
has innovated, adapted, and responded to regulators' and
consumer needs. From fintechs that supply short-term liquidity
protection to banks and credit unions implementing consumer
friendly policies that allow for increased flexibility as
consumers near a zero balance, the American financial services
system continues to provide unprecedented levels of consumer
choice, and they are increasing every day.
Some financial institutions have moved to eliminate
overdraft fees. Others have drastically reduced fees associated
with utilizing the service or increased overdraft coverage.
What is abundantly clear across the board is that these
institutions have taken these actions without the need for
overarching or burdensome Government regulation through
competition.
Data bears this point out. According to a report from the
data analytics company, Curinos--this is their quote--frequent
overdraft use fell by 40 percent to 4.9 percent between 2010
and 2020 in the U.S. Overdraft revenue fell approximately 57
percent, from $40 billion in 2008 to $17 billion in 2019.
The report goes on to note that new entrants, including
fintechs and challenger banks, have created solutions to better
manage or reduce the cost of overdraft. These entities have
experienced a 40 percent improvement in account acquisition
since 2017. Financial institutions that have not adopted
overdraft innovation have experienced nearly a 30 percent
reduction in consumer acquisition. The market forces seem to be
working. These are dramatic shifts that have not needed
lawmaking or regulation to become a reality.
As such, I would ask my colleagues on this Committee and
others across Congress, and within the regulatory agencies, to
understand that contemporary overdraft policies are decidedly
pro-consumer. Fees for many are nonexistent. For others, they
have largely been reduce to the smallest amount necessary to
cover operational costs, mitigate risk, or deter habitual use
by a customer. They are known to the customer, and they simply
should not be classified as junk fees despite what some wish to
allege. I look forward to exploring this issue further with
Chairman Warnock.
I will say in closing there is no doubt in my mind that
some people may get caught up in a bad practice, but let us not
cast the entire industry as being bad actors. I think the
industry is moving in the right direction. Consumer choice and
competition is producing viable products. So let us narrow our
focus in Congress to not add more burdens to the majority of
the industry that, in my opinion, is doing a good job.
Thank you, Mr. Chair.
I believe the Chair and I have agreed. He is gone. We are
playing ping-pong now with vote-a-rama, or many vote-a-rama I
guess we could call that today, and so I apologize that he is
not present.
But testifying today will be: Aaron Klein, who is the
senior fellow in Economic Studies at the Brooking Institution.
Also testifying is Mr. Jason Wilk, who is the founder and Chief
Executive Officer of Dave. Mr. Wilk will be testifying remotely
from California.
Mr. Wilk, can you hear us?
Mr. Wilk. I can.
Senator Tillis. Good. And then finally, our last witness is
David Pommerehn, who is the Senior Vice President and General
Counsel of the Consumer Bankers Association.
We appreciate your testimony today. I am going to turn to
you, but before I do maybe I should wait until Chair Warnock
comes back to get unanimous consent. I think, procedurally, I
cannot do it until another Member is in the room for a
statement from the American Bankers Association. So I will hold
that when he is back present.
So we will go ahead and start with Mr. Klein. Welcome.
STATEMENT OF AARON KLEIN, SENIOR FELLOW IN ECONOMIC STUDIES,
BROOKINGS INSTITUTION
Mr. Klein. Thank you very much, Chairman Warnock, Ranking
Member Tillis. Thank you for holding this timely hearing.
Many banks have announced sweeping changes to their
overdraft policies. By my calculations, changes in policies
announced by 14 banks, including most of the largest, will
amount to $5 billion a year in savings for families living
paycheck to paycheck. If these savings were distributed evenly
across the country on a per capita basis, a State like Georgia
would expect savings of $162 million a year. Industry made
sweeping changes without any new legislation or new regulation,
as Senator Tillis rightly pointed out, and I commend these
banks for their actions.
Today, I will focus on three main points, all of which are
covered in more detail in my written testimony: one,
understanding overdrafts, two, examining changes in overdraft
policies, and three, additional policy solutions which are
still needed to address the core problem; the less money you
have the more money it costs to manage your money.
The key to understanding overdraft is that a small number
of consumers account for the vast majority of fees; 80 percent
of overdraft revenues come from 9 percent of account holders.
These heavy overdrafters pay, on average, $380 a year in
overdraft fees, and as Chairman Warnock rightly pointed out,
cost is the main reason people leave the banking system.
Overdraft revenues vary substantially among banks. Some
large banks average more than seven times as much as others in
fees per customer. It is hard to imagine that among the
Nation's largest banks this variation in their share of heavy
overdrafters is this drastic. Hence, practices and products
offered by banks allow some to generate much more revenue than
others. For a handful of small banks, overdraft is the business
model. The small Woodforest National Bank, operating mostly in
the Southeast, generates more in overdraft revenues per year
than Citibank. Regulators have been asleep at the switch,
giving these banks passing regulatory grades with this unsafe
and unsound business practice.
I want to talk about the changes the banks have been making
in overdraft fees, and they broadly fall into four buckets:
reducing fees, changing time, providing small-dollar liquidity
in different forms, and consumer empowerment. My written
testimony goes into detail on all four, but I want to focus
your attention on one of the most impactful and least
appreciated, changing time.
Overdraft is as much about running out of time as money.
People go negative in their bank account due to the mismatch in
time between credits and debits. These problems are exacerbated
by America's antiquated payment system. Among the solutions the
banks have made are 24- to 48-hour grace periods and giving
consumers earlier access to their wages, a reminder that direct
deposit is far from instant.
Time is money. The provision of extra time is huge. PNC,
among the first banks to change overdraft fees, reports that 63
percent of their customers who end the day with a negative
balance are able to fix the problem and avoid an overdraft
thanks to extra time. The average time to cure is only 13
hours, evidence the majority of their customers' problems are
very short-term mismatches. From PNC's experience, 75 percent
of the reduction in overdraft fees was the result of extra time
and change on the limits of total overdrafts.
For the Committee's consideration, I would like to offer
five policy solutions to address the problems that harm working
families.
First, stop overdraft giants with new regulation. Any
institution that relies on overdraft fees for a majority of its
profit in multiple consecutive years is operating in an unsafe
and unsound business model.
Two, credit unions should disclose data just like banks.
Currently, all banks over a billion dollars in size must tell
us how much overdraft revenue they have. Credit unions should
do the same.
Three, real-time payments. As Treasury Secretary Yellen
recently stated, America's slow payment system is a tax on
working families. If a subset of banks making payments faster
can result in billions of savings for families living paycheck
to paycheck, consider the impact of a full transition to real
time payments. The Federal Reserve could solve some of this
problem today using regulatory authority it was given, but it
has not in 20 years, and it will not as long as it prioritizes
operating its own payment system above regulating the Nation's
payment systems. Legislation is needed, as previously proposed
by Senators Warren and Van Hollen.
Fourth, we need smarter payment regulation.
And fifth, we need universal Bank-On-style accounts. All
financial institutions should provide these accounts which the
American Bankers Association has called best practices. That
standard should be universal.
In conclusion, the explosive growth of America's overdrafts
reveals deeper structural problems with our basic banking
system. The positive changes by banks on overdraft fees are a
step in the right direction but do not address the structural
problems. More needs to be done.
I appreciate the opportunity to testify before the
Committee and look forward to answering your questions. Thank
you.
Senator Tillis. Thank you, Mr. Klein.
Mr. Wilk.
STATEMENT OF JASON WILK, FOUNDER AND CHIEF EXECUTIVE OFFICER,
DAVE
Mr. Wilk. Good afternoon, Chairman Warnock, Ranking Member
Tillis, and distinguished Members of the Subcommittee. Thank
you for inviting me to participate in today's hearing. It is an
honor.
The topic of the hearing aligns closely with the story of
the company I started, Dave. First and foremost, Dave is a
technology company building financial solutions to serve
everyday Americans and working families who are struggling with
some or all aspects of their financial lives. Dave is a
powerful app designed to unlock fair financial services for the
170 million Americans who need it most, the financially
vulnerable and financially coping. Our mission was, and is, to
build products that level the financial playing field.
Everyday Americans are simply paying too much to access the
financial system compared to those who are financially healthy.
By estimates, there are 35 million people who are financially
vulnerable, struggling with every aspect of their financial
life. These individuals, who overdraft 10 to 20 times per year,
are reliant on single-pay credit, need help building credit and
finding new ways to make money.
Additionally, there are approximately 131 million who are
financially coping, struggling with some but not all aspects of
their financial life. This group is overdrafting several times
per year, need help building credit, and need access to
affordable, short- and long-term credit, savings, and investing
advice.
Our goal in 2017 was to start by disrupting overdraft, a
proven pain point for the both the financially vulnerable and
the financially coping. Americans pay more than $20 billion
annually in overdraft fees to traditional banks, with the
typical transaction causing overdraft being those to buy gas
and groceries.
I, myself, was a victim of significant amounts of overdraft
fees when I was in college and following school. I had a job
where my salary was capped at $30,000 a year, living in San
Francisco and having to travel back to Los Angeles. I was
consistently hit with overdraft fees while living on couches.
And if it was happening to me, as somebody who grew up in a
middle-class family, then I can only imagine the impacts as you
move down the income scale, especially moving into
predominantly minority and lower-income communities.
Through research and also based on my own personal
experience, we realized that consumers are primarily using
overdraft knowingly as a form of overpriced, short-term credit
to buy everyday essentials. Against this backdrop in 2017, Dave
launched an app where customers can link any bank account in
the country and we offer them a far superior overdraft
solution.
Our first product, called ExtraCash, is an underwritten,
interest-free advance up to $250 that customers can use to buy
everyday essentials without incurring overdraft fees. This
product has changed lives and propelled Dave to over six
billion customers in under 5 years. ExtraCash has been used
over 50 million times as well. This product does not have any
mandatory fees. In fact, part of the revenue is derived from
customers paying what they think is fair by giving us a tip.
Our second solution to fight overdraft is called Insights,
which notifies customers about upcoming bills like Netflix or
water and power that could send a customer's account into
negative status. We give customers up to a week of
notifications in advance to help them cure bills that could
cause their account to go negative.
Last, and a third part of our overdraft solution, was to be
the first fintech to help put money back in our customers'
pockets with a solution called Side Hustle. This product helps
connect our customers with the gig economy to companies like
Uber, Instacart, DoorDash, Lyft, and other partners. We have
facilitated nearly 3 million applications for work since 2019.
Dave's approach to overdraft has saved our members over
$1.5 billion in overdraft fees and helped them earn over $300
million in income with Side Hustle. In 2021, we followed up
with our own bank account launch, which we launched in December
2020 through a partnership with Evolve Bank & Trust. Dave
Banking comes with no minimum balance or overdraft fees and has
access to over 50,000 free ATMs. Our ultimate goal is to have
customers migrate to this as their primary account status and
stop paying these overdraft fees.
As you can see, at Dave, we are consistently adding
services to our product set to improve our customers' financial
health. To that end, later this year, we plan to add another,
allowing customers to build their credit when using our Dave
ExtraCash product for some of their regular transactions.
At the end of the day, Dave stands with the everyday
person, the everyday mom or dad, who makes up the backbone of
today's working family. We realize that overdraft is a short
term credit solution for the next tank of gas or bag of
groceries and it is critical to millions of Americans, but
traditional financial services fail to deliver a fair product.
At Dave, we are working to level the financial playing field
for those who need it most.
Thank you again for the invitation to appear before you. I
look forward to answering your questions.
Chair Warnock [presiding]. Thank you so very much. Sorry, I
had to step out to vote. We have got a number of things going
on as usual around here. Thank you, Mr. Wilk.
Next, we will hear from Mr. Pommerehn.
STATEMENT OF DAVID POMMEREHN, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, CONSUMER BANKERS ASSOCIATION
Mr. Pommerehn. Thank you, Chairman Warnock and Ranking
Member Tillis and Members of the Subcommittee.
I am David Pommerehn. I am General Counsel for the Consumer
Bankers Association. CBA represents the retail banking
industry, whose products and services provide access to credit
to millions of consumers and small businesses. I greatly
appreciate the opportunity to testify before you today.
As Chairman Warnock mentioned at the beginning of his--in
his opening statement, with ongoing financial difficulties
exacerbated by the pandemic, average Americans are struggling
to cover emergency cash-flow needs. Banks are aware of these
challenges--of the challenges consumers are facing and are
working diligently to provide access to safe and affordable
products.
One important tool in meeting these needs is overdraft
services. This product is largely based on necessity and choice
and, for many, may be the last viable source of short-term
liquidity.
In 2010, significant changes enhanced consumer protections
for overdraft services by increasing transparency and improving
disclosures. Changes to the Electronic Funds Transfer Act and
the Truth in Savings Act required consumers be afforded the
ability to affirmatively opt in to overdraft services for point
of sale debit card transactions and for ATM withdrawals. These
changes also required the consumer to receive disclosures
concerning their right to revoke the decision to opt in at any
time and including an accounts statement disclosure whenever
they actually incur an overdraft fee. Consumer choice is
central to the functionality of the overdraft product and
allows for maximum transparency.
Consumer demand for overdraft services is also driving
innovation, as we have heard before. This has led banks to
increase the affordability and access for those who use
overdraft to meet their cash-flow needs. A 2021 study,
referenced by Senator Tillis, by Curinos, a global data
intelligence firm, found that overdraft fee revenue is down
significantly, roughly falling 57 percent from 2008 until 2019.
Put in real dollars, overdraft fee revenue for banks fell from
nearly $40 billion in 2008 to nearly $17 billion in 2019.
Curinos projects that this significant decline in fee revenue
will continue as a result of bank-led innovation.
In fact, this innovation is driving the market and
competition, and organizations, as Senator Tillis referenced
before, that have adopted better solutions for overdraft
management have been able to increase their base growth
accounts by about roughly 40 percent since 2017. Conversely,
those institutions that did not make change saw roughly a 30
percent reduction in growth in their accounts.
Bank-led initiatives aimed to help consumers avoid fees
have also dramatically reduced the number of small purchases
tied to overdraft. Since 2008, the average size of a purchase
triggering an overdraft fee quadrupled from $50 to $200.
The Curinos research also found consumers demonstrate a
deep understanding of who they bank with and how they use
overdraft. In fact, more than 80 percent of overdraft
transactions come from consumers with the clear intention of
using it to cover their emergency payments, and they are well
aware that they would incur a cost and would like to incur a
cost to make sure that they have access to that revenue stream.
Outside of overdraft, few options remain for consumers to
meet their cash-flow needs within the highly regulated banking
industry. In 2021, OCC Acting Comptroller Michael Hsu
recognized overdraft services as one of the last viable sources
of short-term liquidity for U.S. consumers. Additionally, just
last week, CFPB Director Rohit Chopra underscored that the
overdraft market is evolving and competition is benefiting
consumers.
When debating policy affecting overdraft services, we urge
policymakers to consider additional solutions to help consumers
who need short-term cash-flow options, such as small-dollar
loans. A recent bipartisan GAO study highlighted the fact that
banks are hesitant to offer such loans in part because of ever
evolving regulatory changes. Specifically, the GAO noted that
in 2013 to 2020 Federal regulators issued 19 separate policy
considerations related to small-dollar loans. These changes
create doubt about the stability of future regulations
concerning short-term loan products and adversely impact
consumer access. Without access to affordable bank-offered
products and services, consumers will be forced to turn to
alternative, underregulated products offered by ill-supervised
organizations.
Banks are listening to their customers. They are investing
significant resources toward innovating and reducing the cost
of overdraft services, and it is benefiting the families they
serve.
We encourage policymakers to work with all stakeholders,
including doing direct consumer research, to avoid any
unnecessary restraint to overdraft products.
I thank you for your time, I thank you for the ability to
appear here today, and I look forward to your questions.
Chair Warnock. Thank you all so much for your testimony,
and let us begin with our questions.
In many cases, Americans who overdraft are likely to do so
more than once. According to the CFPB, banks charge 80 percent
of their overdraft fees to fewer than 9 percent of account
holders and the majority of fees collected come from an even
smaller percent of that group. The CFPB also found that
consumers who frequently overdraft are more likely to be credit
constrained, have lower credit scores, and are less likely to
have access to affordable credit. These are everyday,
hardworking people.
Mr. Klein, is the use of overdraft services a symptom of
financial distress, and what point do these fees only
contribute to that cycle?
I would also like to hear your comment about where the
banks are in terms of their collection of overdraft fees. We
heard the data around 2019, but I think last year banks earned
$33 billion in overdraft fees. Could you respond to that and
speak to the use of overdraft fees and whether or not you see
that as a symptom of financial distress? And, do these fees
help people, or do they contribute to the cycle?
Mr. Klein. So, Chairman, thank you very much for that
thoughtful question because it is both a symptom and a cause.
If you have $380 a year in overdraft fees, that is 1 percent of
your income if you earn $38,000 a year, which is, you know, a
reasonable--not that far off of the median wage, particularly
in some parts of the country.
And as you point out, these heavy overdrafters, who use the
product frequently, have become targets for certain banks and
certain business models who actively seek to find them. You
mentioned the member in Georgia of the military. Well, Armed
Forces Bank, which makes more than 75 percent of its profit on
overdraft fees, averages $150 a year in overdraft fees per
account. Most of the banks with good practices are at $5, $10 a
year, and the other banks that are making changes are headed in
that direction.
They make $150 a year, and Moody Air Force Base in Georgia
is one of their locations. Right. They are targeting these
folks. And it is not so easy, if you are enlisted and deployed,
to change your bank and do all those different payments and all
those streams.
So it is a symptom; it is a symptom both of not having
enough money and not having enough time. As the data shows from
PNC and other banks, and my own research shows, time is money.
Seventy percent of customers at a check cashing store have
a bank account. Now why are you at a check cashing store if you
have a bank account? Well, on Friday, if I get a check, how am
I going to pay for my mom's flowers on Mother's Day? If I
deposit it in a bank, the money will not be there until Monday,
Tuesday, maybe Wednesday. I do not know for sure. The bank does
not know for sure. Check casher gives me cash.
It is one of the reasons why $66 million of the first round
of stimulus checks--because, remember, the Treasury sent checks
to 70 million families--ended up in the hands of check cashers.
So I think it is both a symptom and a cause.
For your second part of your questions, I am not sure about
that Curinos study. I read the appendix. It was like a 1 page
pamphlet, not a study in there.
You know, there are two different data sources a lot of
people use. One is a CFPB, which shows 15 to 16 billion a year,
and the other is this Moebs study, which is like 30 to 35
billion a year, and it is hard to reconcile the two sometimes.
There are two differences in them that have popped up. One
is Moebs counts credit unions, which I think nobody here knows
the data on it because they are exempt from filing. I do not
know why if you run a $30 billion a year credit union why you
cannot tell the same as a bank. And two is there is an
assumption in the Bureau's methodology that all banks operate
in the same fashion, and so the small folks are like the big
folks and if I know the total share.
I question that assumption. For my own data, there are a
handful of banks for whom these heavy overdrafters are their
entire business model, and that is a very different type of
institution. It is more like a check casher with a banking
charter than a big, diversified bank that you describe, which
makes money off of overdraft but makes money off of a lot of
other things.
Chair Warnock. Thank you so much.
Do you believe that the low fees--well, Mr. Wilk, for
consumers who frequently use your company's services, what
effect does your company have on customers' overall financial
health, and do you believe that the low fees that your service
charges encourages more overdrafting?
Mr. Wilk. Thank you for the question, Chairman. So
ultimately, we view overdraft as a positive product. It is just
the fees that people have access to are punitive and the ones
that we are trying to eradicate.
The average customer at Dave, when they connect their
account, we are able to see their past year of transactions so
we can see that our average member is spending about $400 in
overdraft fees to their bank. After using Dave, we can cut that
down significantly just by providing our own advance feature on
top of their existing bank account. That saves our customers,
on average, about $150 to $200 per year in fees as their banks
are still able to charge them fees for some elements of
overdraft we are not able to prevent them from. If we can get a
customer to sign up for our own checking account product, we
can eradicate those fees entirely as our checking account does
not have any overdraft fees or minimum balance fees.
Ultimately, what we are trying to do is help the average
customer be able to afford a $400 emergency, which most
Americans cannot afford. I think it is about 60 percent of
people cannot afford a $400 emergency. And so we think we are
making meaningful progress on our ability to cure that for
customers.
Additionally, with our upcoming credit building solution,
our focus is on how we can graduate our members from overdraft
into more reasonable, short-term credit solutions.
Chair Warnock. Thank you so much. We continue with our
questions, and I will turn now to Ranking Member Tillis.
Senator Tillis. Thank you, Chairman Warnock. Again, thanks
to the witnesses for being here.
Mr. Pommerehn, I want to make sure I have got this right.
You have to opt in to an overdraft program, right?
Mr. Pommerehn. Yes, sir, for point-of-sale, debit card
transactions, and for ATM transactions, you have to
affirmatively opt in at account opening.
Senator Tillis. And I do not know if you have any research
data, but do you think that many of those who consciously
decide to opt in see value in the program?
Mr. Pommerehn. Well, as the Curinos study shows--and I
apologize for just the 1-pager in the appendix. We will provide
the full study to the Committee.
Senator Tillis. Yeah.
Mr. Pommerehn. To the witnesses. It points out 80 percent
of consumers who opt in, in fact, use the product knowingly,
and so it is a product consumers want even in the--even when
there are other products that do not offer overdraft services
at all or even offer an opt in to those overdraft services.
Senator Tillis. What do you think about the
characterization of this as a junk fee? It appears to me to
serve a purpose.
Mr. Pommerehn. It does; it serves a--it does serve a
purpose. It covers liquidity needs for consumers who do not
have other alternatives, for the most part. Knowingly using an
overdraft product creates a situation in which a consumer can
get that gas or can get those groceries that they need to use,
but they have to affirmatively opt in to do so first.
If the product is not opted in--if you do not opt into the
product, you do not receive the service. That is bottom line.
So consumers who utilize the service often use it to cover
those emergency liquidity needs, and I would say that there are
not a whole lot of viable solutions on the market today from
banking institutions that would help this consumer with their
short-term liquidity needs
Senator Tillis. Yeah. Mr. Chairman, I want to wait until
you get back. I do not think I can do unanimous consent when I
am the only one in the room, but I would ask unanimous consent
that I have the statement from the American Bankers Association
submitted for the record.
Chair Warnock. Without objection.
Senator Tillis. Thank you.
Mr. Wilk, your business, Dave, do you take all comers?
Mr. Wilk. Sorry. Could you repeat that? Do we take who?
Senator Tillis. Do you take all comers? So if somebody goes
to your web site, is there anything that would constrain them
from getting access to your products and services?
Mr. Wilk. No, there is not. As long as they can pass a
basic KYC test, which we can identify that person as a--with
their Social Security Number, address, and phone number, they
can access our service.
Senator Tillis. So, credit history, payment history, no
factors like that weigh into it?
Mr. Wilk. That is right. So as long as they can pass KYC,
they are able to immediately get accepted for a Dave checking
account.
Senator Tillis. OK.
Mr. Wilk. For a customer to be approved for our ExtraCash,
we do not use the legacy credit system, so a customer can be
approved just based on their transaction history alone. We do
not look at----
Senator Tillis. I know you mentioned that there is kind of
an opt-in for a tip for those who may have taken advantage of
what would be the equivalent of overdraft coverage, but how do
you make money?
Mr. Wilk. So we make money in several ways at the business.
Starting with our checking account, we make money off of
interchange. So every time somebody swipes their card, we make
about 1 to 1.5 percent of that transaction.
Additionally, for our Insights product, where we help
customers predict upcoming bills, like their Netflix and water
and power, we charge a $1 a month subscription for that.
As far as Side Hustle, we make money from referral fees
from employers when customers apply for work.
And on the ExtraCash feature itself, the customer can
access that product entirely for free, but we do make money
from two optional fee structures, one being tips, where
customers can give us an optional fee if they enjoy the
service. On average, that tip is around $4 for people that do
tip us. In comparison to a $34 or $35 overdraft fee, we think
that is an incredibly good deal for consumers.
Additionally, we have an expedited processing fee. So if
someone wants to have the money sent to their bank account via
ACH, they can have the money in their account absolutely for
free. If they want the money sent to their debit card, which we
use the Visa and MasterCard send rails, we do charge a small
processing fee similar to a Venmo or Cash App.
Senator Tillis. Mr. Klein, why wouldn't the bank that you
mentioned that has a significant revenue stream from overdraft
fees, why wouldn't that be ripe for the picking for a fintech
like Dave?
Mr. Klein. So it is a good question. Bank accounts like
this are often sticky in terms of that, particularly the cost
of transitioning. As I said, imagine if you are a military
family and you are deployed, right, and you are dealing with
all this stuff. You have a family at home, with kids. Changing
your bank account is very sticky and messy. You have a lot of
automatic payments, a lot of automatic transitions. And, you
have to live your life as you are working paycheck to paycheck,
trying to make ends meet, and so it becomes very difficult to
have that type of situation.
Senator Tillis. But it sounds like to me in the case of the
Dave platform they would not necessarily need the bank; they
would just simply no longer use that service.
Mr. Klein. Well, I think in terms of having the direct
deposits--I mean, part of the problem here is there are lots of
other ways in which these overdraft fees are generated. A
couple that were mentioned were a point-of-sale and ATM, but a
different trick that is done is reordering payment flows, from
biggest to smallest and the time.
You know, the way that our payment system works under this
ACH system it is like a batch. It is like putting yourself in
the laundry. It all goes in together and comes out at once. It
is not in the order that you are done.
Now most banks are pretty good at this best practice. A
recent study by the CFPB found almost 90 percent of banks and
two-thirds of credit unions posted credits before debits, put
the money in your account before they took it out. However,
one-third of credit unions and 10 percent of banks posted some
debits before credits.
So the time--once you create this time wiggle room, some
institutions have the ability to reorder your transactions in a
way that maximizes overdraft fees for them. Some of them are
leaning deep into that product and that practice, and that is a
practice that I think is problematic and unfair, and it is one
that you cannot be--opting in does not really have meaning in
that context when everything--when the bank is deciding to
reorder your transactions.
Senator Tillis. I am going to have to go vote now, Mr.
Chairman, but I just want to get back to the concept of really
understanding how the market is transitioning and really
understanding the potential additional complexity and cost and
threat to banking, to the banked and the unbanked, if you do
not get incremental regulations right.
And if I had not seen--and I would love for you to submit
for the record. A trend, it seems like the market forces and
innovation are pushing things in the right direction. And it
always gives me pause when Government wants to come in because
when Government comes in it tends to stifle competition and
stifle innovation.
So it is just like the hearing that I had in Judiciary
today on interchange fees, where some want to cap them. I think
that that could have--as some aspects of the Durbin amendment
had--negative, unintended consequences.
So as we move forward and discuss potential policy options,
we need to fully understand this and not necessarily stand in
the way of competition and innovation.
Thank you, Mr. Chair.
Chair Warnock. Thank you, Ranking Member Tillis.
I understand that Senator Cortez Masto will come virtually.
Senator Cortez Masto. I am here. Hello. Thank you, Mr.
Chairman. Thank you to our panelists.
Mr. Klein, let me start with you. There are more than 200
bank and credit union accounts that meet the Bank On national
account standards. Eleven of these financial institutions
happen to be in Nevada. In Nevada, Bank On accounts are partly
why more Nevadans have access to affordable bank accounts.
So, Mr. Klein, could you do me a favor? Can you explain how
Bank On accounts have helped millions of people access the
banking system?
Mr. Klein. Absolutely, Senator. The FDIC began a pilot
program in 2012 to come up with a model for what they called a
safe account, and these were accounts that had low costs, had
full access to online mobile banking, debit cards, et cetera,
did not charge people for basic standard services, and did not
have overdrafts. These accounts have proven incredibly popular.
I think one out of every five new accounts at Citibank, for
example, was one of these types of accounts.
But in order to do it, the bank has to decide and go
through a process. The Bank On nonprofit picked up this mantle
from the FDIC and started a certification process. And then the
bank has to not just have it somewhere but have it front and
center, offer it and make it clear and available to the
consumer, not just somewhere hidden on a shelf. When that
happens, these accounts are popular, and they are profitable
for banks. They might not be as profitable as squeezing folks
for overdraft fees, but they more than cover their costs.
Remember, there is a punitive nature to these overdraft
fees. It is not $35 for a bank to provide a $2 cup of coffee
credit that gets paid back, in PNC's case, on average, in 13
hours. Right?
So these accounts have proven so popular and successful
that the American Bankers Association has called it a best
practice. If that can be a best practice for industry, it ought
to be mandatory. There is draft discussion language in the
House to require this for all institutions over $10 billion.
And I do not see why every bank in America, and credit union,
who is chartered by the Federal Government and provides a
Government service, cannot provide one of these low-cost,
universal accounts to everyone.
Senator Cortez Masto. And so, Mr. Pommerehn, let me ask you
to weigh in on this. Do you see the other half of financial
institutions that do not yet offer Bank On accounts doing so
voluntarily?
Pommerehn. Yeah, thank you for the question, Senator. Many
of our member institutions do offer Bank On accounts, and many
of them offer accounts that do not carry overdraft fees
whatsoever. Even, there is no opt-in process for those
accounts.
I would just--it is always good to keep in mind, though,
that even a normal checking account there is an opt-in process.
The consumer, for point-of-sale and ATM transactions, as Mr.
Klein points out, has to affirmatively opt in to those
services.
So there is a need, obviously, out there for short-term
liquidity options. Overdraft is just one tool in that tool box.
And we encourage policymakers to explore alternatives, such as
small-dollar lending, to help consumers mitigate the value--the
overdraft fees that they may incur.
But banks are moving that way, as we have heard. They are
innovating in this space rapidly, and they have been doing it
for many years now. Huntington's 24-hour grace was put in place
11, 12 years ago. The de minimis exemptions to take care of
that proverbial cup of coffee, $35 cup of coffee, had been in
place for many institutions for many years now.
So the market is moving, consumers are going to
institutions that offer these types of services or these
mitigating variables to help them avoid overdraft, and banks
continue to innovate. And I think you will see more innovation
in this space as we move forward, as was pointed out, and I
think overdraft revenue as a whole will be--will severely
decline in years to come.
Senator Cortez Masto. Yeah, I would hope so. I was
listening to the conversation earlier. Any financial
institution really that survives on overdraft fees has a very
cruel and, I think, troubling business model that needs to
change.
But let me ask Mr. Klein on direct deposit payroll loans.
Banks know that customers who enroll in direct deposit receive
regular paychecks, and some banks offer customers access to
their incoming paycheck 2 business days early at no cost. I am
wondering if you can talk a little about why access to direct
deposited payroll up to 2 business days early is a best
practice.
Mr. Klein. Sure, Senator. You know, one of the things that
struck me when I first started writing about this--I made the
decision, whether it was a mistake or not, to look at some of
the comments in the Facebook post from the Brookings
Institution when I was writing about this, and I could not--I
was stunned about the slow payment system, how many people
said, ``Well, that does not affect me. I have direct deposit.''
People think direct deposit is instant. Far from it. If you
are going to get--if you are going to see your paycheck hit
your bank on Friday, the odds are that small business has
already put your money--sent your money. They probably sent it
on Tuesday, and that money gets held in this antiquated payment
system.
Chairman Warnock made the point about small businesses.
Small businesses do not like having to make payroll 2, 3 days
early. Meanwhile, customers and people living paycheck to
paycheck cannot afford to wait. This is particularly
problematic when the first of the month falls on a Thursday and
payday falls on a Friday. Again, there is no reason for this
money to be sitting there. Direct deposits could occur
instantly if we had a faster payment system or if we used
something other than the ACH.
The Treasury Department's own payments for emergency
stimulus payments that they sent through the banking system
sent the information on Friday and it did not hit people's
accounts till Wednesday. How are you supposed to eat and have
diapers if you ran out of money over the weekend? Giving people
access to their own money faster, to me, is a small-c,
conservative idea.
And the direct deposit system relies on this multiday, slow
ACH system where America is alone. You go to other countries in
the world; it is not like this. The Bank of England put in
real-time payments in 2008. In Singapore, when the Government
sent the people their emergency money, it was in their account,
ready to use, in an hour.
Senator Cortez Masto. Thank you. Thank you again to the
panelists. So appreciate the conversation.
Mr. Chairman, thank you.
Chair Warnock. Thank you. Thank you so very much, Senator
Cortez Masto.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Thank you to
all of our witnesses today.
And I am going to pick up, Mr. Klein, right where you left
off because, as you pointed out repeatedly, as I think we all
know, the current system disadvantages lower-income individuals
with respect to the timing of payments. And moving to a real
time payment system would address a lot of that because when
you are living paycheck to paycheck, and you deposit your
paycheck 1 day and it takes days to clear, and during those
days you have to draw on your accounts you get, you know, hit
with various fees, which is why you have been pushing, I have
been pushing for a long time, to move the Federal Reserve to
the FedNow system.
Senator Warren and I introduced legislation to move in that
direction, and every time we have a representative from the
Federal Reserve here I ask them about progress. As you know, we
are hoping to roll out the FedNow system next year, and I am
interested in your assessment of where we are and whether or
not we will be able to hit the ground running when that happens
based on your understanding of how far along the road we are.
Mr. Klein. Senator, I thank you for that question. I thank
you for your tremendous leadership on this issue for many
years. I am not sure we would be nearly as far along the road
as we would, in fact, I am positive we would not, without your
laser-like focus on this issue, but I am very concerned we are
not there.
Look, in 2012, the Fed formed a task force called Faster
Payments 2020 with a mission that we would have real-time
payments in 2020. They gave themselves 8 years to do that. Now
keep in mind the Bank of England decided in 2007 to get faster
payments; 18 months later, they had it. That was when the first
iPhone came out. The Bank of Mexico put in real time payments
in 2004, the Bank of Brazil in 2005.
The Federal Reserve finally committed, after much pressure,
to develop this FedNow system and said it would take them 5
years. Why? Now they say maybe we will get in four. Now we see
all this talk about a central bank digital currency. Now I am
not here to talk about that, and I have opinions, this or that,
but what I am very concerned about is an attempt to delay
FedNow to a later date while we start thinking about CBDC.
Had we had real-time payments when the Bank of England did,
we would have over $100 billion less of income inequality in
America through lower overdraft fees, check cashing fees,
payday lending fees. I did not even include late fees in some
of these other fees that are hard to do. So every day we wait
costs.
Meanwhile, many of the financial institutions regulated by
the Fed and the OCC rely on this overdraft, and I am concerned
about some structural conflicts of interest in a system where
you have a central bank regulating all payments. The Fed, with
one regulation, could the first $5,000 of your check available
immediately, as your legislation and Senator Warren's proposed
would have done. Congress gave them that authority in the 80s,
and they have sat on their hands with it until they would build
their own system.
It is a structural conflict of interest for the Fed to
regulate payments and operate their own system, and I am not as
confident that we will be there within the next year and that
when it opens it will open in a way that is meaningfully
inclusive and actually moving everybody immediately.
I think industry. I think fintech solutions and other
folks. There is a reason that my fellow witness from Dave is
able to charge, I think, about 1.5 percent for instant
payments, and Venmo and PayPal and the rest can do it;
consumers demand it. And so I am worried that we are going to
sit here waiting forever for the Fed to provide it.
Senator Van Hollen. Well, I appreciate your frank
assessment of where we are. We are going to work to light a
fire even more under the Fed to get it moving because, as you
say, every day that goes by without real-time payments is
another day that especially lower-income folks are getting hit.
Mr. Pommerehn, it is great to have a University of
Maryland/University of Baltimore law grad here. Mr. Klein has
identified some of the tricks that some banks and credit
unions, and I want to not paint with a broad brush necessarily.
Senator Tillis is right; not all these institutions engage in
some of these tricks.
But you would agree that we should phaseout the practices
that he has discussed? For example, essentially, the posting of
debits before credits and the practice of reordering payment
flows from largest to smallest, would you agree that those
practices should be phased out?
Mr. Pommerehn. Thank you, Senator. Yeah, I would say that
many banks are actually phasing out those practices, as pointed
out by Mr. Klein. We are moving in that direction. We have been
for many years now.
Senator Van Hollen. Right. Again, I think your members have
been moving in that direction, and I think that is a good
thing. Do you encourage all your members to phaseout those
kinds of practices which really are, in my view, trickery?
Mr. Pommerehn. Senator, we, as a trade association, do not
counsel our member institutions on what they should or should
not do. We simply work with them on policy here on Capitol Hill
and with the Federal regulators. But certainly I think, again,
we have seen quite significant movement in that space, not just
in the last year or so but from a decade past.
Senator Van Hollen. Got it. Well, the sooner we get to 100
percent the better. And as you point out, we would all like to
see the market incentivize these changes, but it is when it
does not that action is necessary.
Thank you both and thank everybody for their testimony.
Thank you, Mr. Chairman.
Chair Warnock. Thank you so much, Mr. Van Hollen.
I understand that Senator Warren is on the way. In the
meantime, I will ask another question.
I think there is consensus here that competition is driving
down the cost of overdraft. At some banks and credit unions, we
are seeing movement, but this new low-fee or no-fee approach
assumes that people can choose their banking services. Not
everybody actually has the same choices, the people in Wayne
County, Georgia, for example. According to the FDIC, there are
only five bank branches in Wayne County and all of them are in
Jesup. I am from Savannah, so I know where Jesup, Georgia, is.
So, over 600 square miles, five banks.
Mr. Klein, what is driving the high level of overdraft fees
still charged by some banks?
Mr. Klein. So, Chairman Warnock, I think what we find is a
small number of people are heavy overdrafters. Some banks find
themselves with a small share or natural share of those
customers, other banks change practices in ways that squeeze
those people or not, and a small handful actively go to seek
those folks because they are much more profitable customers
than slightly wealthier people that do not do heavy overdrafts.
And what you find is that people cycle in and out of the
banking system on that bottom group. So if 5 to 6 percent of
households are unbanked and you have another 9 percent of folks
that are these heavy overdrafters, and you go and you ask the
unbanked, why did you leave the system, as you pointed out in
your statement, the number one reason, the system was too
expensive for me. Right?
I believe that that is that churn that is going in. Some of
those folks are leaving the system. Some of those folks are
coming in.
In addition, I think the lack of offering products that are
proper for folk. Right? You asked the question, why are there
these high fees? The fees are not based on the cost to the
bank. It is not $35 to the bank to provide an overdraft fee. As
was briefly said in the long list, part of the purpose is to be
punitive, to discourage their use. But with these heavy
overdrafters, it is not discouraging their use; it is simply
milking them out of money that then structurally reinforces
their cycle of poverty and struggled that you referenced
earlier.
And that is particularly true in communities without many
banking choices, but there is a bit of an illusion of choice
because, oh, you have 5,000 banks in America, you have 5,000
credit unions. Right?
In reality, the cost of transition is very high in an
institution, and it is very high for consumers. If you had to
change your cell phone number, would there be as much
competition cell phones? Right? But you have to change all your
banking and routing and other account information. Makes a big
difference in terms of the structural barriers to change.
Chair Warnock. Thank you so very much.
Ms. Warren.
Senator Warren. Thank you very much, Mr. Chairman, and
thank you very much for holding this hearing today, very
important, matters to millions of families across this country.
And thank you to our witnesses for being here today.
So during the pandemic, America's banks got a lot of help
from taxpayers. They were given special dispensation to
overdraw their accounts at the Federal Reserve if they needed a
little help. Now in return, the regulators asked the banks,
please do the same thing for your customers.
So last year, I asked the CEOs of the four biggest banks,
JPMorgan Chase, Wells Fargo, Bank of America, and Citi whether
they had followed through and automatically waived overdraft
fees during the pandemic. Not one of them raised their hand. In
fact, in 2020, they collected more than $4 billion in overdraft
fees from families.
So I asked them, would they return the money? And you
guessed it. The CEOs had nothing to say.
But over the last few months there has been a, quote, race
to the top, and some of these banks, like Citi and Capital One,
eliminated overdraft fees altogether.
Mr. Klein, you are an expert on the overdraft system and
banks' reliance on these fees. Three of the Nation's biggest
banks--JPMorgan Chase, Bank of America, and Wells Fargo--still
have not eliminated overdraft fees. So can you give us an idea?
How much money are they raking in from these fees every year?
Mr. Klein. Senator Warren, they are making billions. In
2019, before the pandemic, JPMorgan Chase earned over $2
billion in overdraft fees; Wells Fargo, about 1.7; and Bank of
America, a bit over 1.5. Together, they earned $5.25 billion.
Those figures declined, along with the entire industry, as a
result of pandemic assistance authored by this Congress and the
one before it. But even then, in 2021, overdraft--each of those
banks were making more than a billion dollars a year in
overdraft fees, and overdraft fees are basically pure profit
for banks.
Senator Warren. OK. So we got that end of it, the banking
end. Over a billion dollars for each one of these giant banks.
So let us look at the other end. Who are the consumers who
are shelling out the billions of dollars to these banks? Well,
according to the CFPB, 80 percent of all overdraft and
nonsufficient funds fees are paid not by everyone but by only
about 9 percent of account holders and these families have an
average balance of less than $350. According to Pew, they are
also disproportionately Black and Hispanic Americans who make,
on average, less than $50,000 a year. In other words, people
working hard to try to make it from here to the end of the
month.
So JPMorgan Chase, Bank of America, and Wells Fargo are
collecting billions of dollars in overdraft fees from
struggling families every year.
Mr. Klein, what would happen to these banks if they just
stopped collecting overdraft fees? Would they go out of
business? Would they stumble and teeter and just fall off the
profitability line?
Mr. Klein. They would be fine, Senator. Overdraft fees are
a small share of these institutions' profits. Last year, they
were about 3 percent for JPMorgan, 4 percent for Bank of
America, slightly higher for Wells.
My research indicates that, broadly speaking, the less
overdraft was a share of bank profit the more the bank is
willing to adopt changes that reduce overdraft revenues, like
Citibank, who never really tried to maximize overdraft from its
customers and for years managed to be highly profitable without
leaning on people living paycheck to paycheck.
This one idea that industry actions alone will fix the
overdraft problem is flawed. Senator, there are some entities
with the apparent blessing of their regulators that are
functionally not banks or credit unions, that earn 100 percent
or more of their profits just on overdraft fees alone. These
are not banks. These are check cashers and payday lenders with
a banking charter.
Senator Warren. Yeah. Well, you know, Chase, Bank of
America, and Wells Fargo are making tens of billions of dollars
in profits, and yet, they are still squeezing families on
overdraft fees. If Citibank and Capital One can eliminate
overdraft fees, so can Chase and B of A and Wells.
And that is why earlier today, along with Senator Booker
and Representative Carolyn Maloney, we sent letters to the CEOs
of JPMorgan Chase, Bank of America, and Wells Fargo, urging
them to end overdraft fees, and by the way, there are 18 State
attorneys general who also agree with us on this.
But we should not sit around and wait for banks to do the
right thing. Congress should pass my and Senator Booker's Stop
Overdraft Profiteering Act, which would crack down on
exploitive overdraft fees and practices. I also want to do one
more. The OCC could step in. They have the power to eliminate
these fees. Instead of working for the biggest banks, it is
time for Government to work on the side of working families.
So once again, thank you, Mr. Chairman, for putting this
hearing together. I hope we get some action that helps the
families who need it.
Chair Warnock. Well, thank you so much, Ms. Warren. And
that is the purpose of this hearing, to shine a bright light on
this issue. Glad to see some of the progress that we are seeing
with some of the banks, but it is also proof positive that
others could move in the right direction.
And with that, all questioning has concluded. Thank you to
all of our witnesses for being with us today.
This hearing highlights how Congress is focusing on
lowering costs for the American people and how important our
Nation's financial institutions are in helping families and
small businesses and communities to thrive. There is a
difference between offering a service that will lend a hand and
offering a service that will kick someone while they are down.
In March, I joined Chairman Brown in leading a letter, with
our colleagues, to the largest banks in the country that have
yet to make meaningful progress on alleviating overdraft fees
for their customers, and I have also prepared a report that my
office will be releasing soon based on their responses and
responses to the CFPB's request for public input on junk fees.
The report will illustrate the gap between how industry views
these services and fees and how the public perceives them.
Lowering onerous fees is something I will keep pushing for
through collaborating with financial institutions and, when
necessary, through legislation and working with regulators to
stop bad actors from taking advantage of hardworking Americans
and the most vulnerable struggling families. This topic is
about saving people money, creating a viable economy that works
for all Americans, and ensuring hardworking families are not
swindled out of a shot at financial stability.
For Senators who wish to submit questions for the record,
those questions are due 1 week from today. For our witnesses,
you will have 45 days to respond to any questions.
Thank you all again.
And with that, this hearing is adjourned.
[Whereupon, at 3:39 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF AARON KLEIN
Senior Fellow in Economic Studies, Brookings Institution
May 4, 2022
Chairman Warnock, Ranking Member Tillis, thank you for holding this
timely hearing examining the impacts of overdraft fees. \1\ Overdraft
fees, developed as a convenience service for occasional instances when
a consumer ran out of funds, morphed into a cottage industry with
estimates of total fees paid by consumers ranging up to more than $30
billion a year. By definition, every overdraft fee is paid by a person
who has run out of money while trying to live their life. These fees,
which are effectively short-term loans, can be extremely high-cost
relative to the small amount of money received by the customer, short-
lived in time borrowed, and carry small chance of default. As a result,
overdraft fees result in nearly pure profit for the bank or credit
union. No wonder one bank CEO named his yacht ``Overdraft.''
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\1\ The views expressed are my own and do not necessarily reflect
the views of other staff members, officers, or Trustees of the
Brookings Institution.
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After decades of racking up major profits off of American families
living paycheck to paycheck, many banks, including most of America's
largest banks, have announced sweeping changes to their overdraft
policies. These changes will sharply reduce costs for their customers.
Savings will go directly to people living on the financial edge and
come directly out of bank profits. The result will be a more equal and
just financial system and a significant dent in the high costs of being
poor. By my calculations, the combined savings for consumers from
overdraft changes already announced will be approximately $5 billion a
year. Even by Washington standards, that's real money.
Industry made these sweeping changes without any new legislation or
new regulation. I commend these banks for their actions. They are doing
the right thing for their customers, which will also reduce income
inequality and, over time, reduce the number of unbanked households in
America.
However, as my testimony will show, the difference in the actions
taken by banks varies substantially, and some institutions' changes are
more meaningful than others. Critically, a handful of banks have become
dependent on overdraft for the majority--and in some instances
totality--of their profit. These overdraft giants cannot structurally
walk away from overdraft nor will they. Regulators have long been
asleep at the switch in allowing these institutions to operate like
this. New regulation is still needed on the basis of safety and
soundness to address any bank or credit union that relies on overdraft
for the majority of their profit.
My testimony will focus on three main points:
1. Understanding overdrafts and why some institutions are making
changes.
2. Examining changes in overdraft policies to elucidate the problems
and paths to solutions for families living paycheck to
paycheck.
3. Additional policy solutions to address both remaining problems in
overdraft and the broader root causes that have led America to
be a Nation where the less money you have, the more money it
costs you to deal with your money.
Understanding Overdraft
Overdraft fees are major profit centers for banks and credit
unions, with estimates ranging from roughly $15 billion a year for
banks alone \2\ to over $30 billion a year for banks and credit unions.
\3\ Overdraft fee income peaked in 2019 as pandemic assistance and
other Covid-related factors reduced overdraft revenue across the board
for almost every institution. \4\ While overdraft revenue rebounded in
2021 as pandemic assistance subsided, other changes have taken place
that will likely make 2019 the highwater mark for overdraft revenue.
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\2\ Consumer Financial Protection Bureau. ``CFPB Research Shows
Banks' Deep Dependence on Overdraft Fees''. December 1, 2021. https://
www.consumerfinance.gov/about-us/newsroom/cfpb-research-shows-banks-
deep-dependence-on-overdraft-fees/
\3\ Nova, Annie. ``Banks Will Collect More Than $30 Billion in
Overdraft Fees This Year. Here's How To Avoid Them''. CNBC, December 1,
2020. https://www.cnbc.com/2020/12/01/banks-will-get-30b-in-overdraft-
fees-this-year-heres-how-to-avoid-them-.html
\4\ Fox, Zach, and Ronamil Portes. ``Overdraft Fees Jump 40
Percent YOY but Still Headed Lower From 2019 Levels''. S&P Global,
August 25, 2021. https://www.spglobal.com/marketintelligence/en/news-
insights/latest-news-headlines/overdraft-fees-jump-40-yoy-but-still-
headed-lower-from-2019-levels-66207671
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Among those other changes has been the entry of a growing number of
financial technology firms (fintechs) partnering with banks to provide
basic banking services to consumers. Many of these products do not
allow for traditional overdraft fees. The lack of overdraft fees is
often figured prominently in their marketing, a sign that consumers
would be attracted to non-overdraft banking. \5\ The growth of fintechs
probably played a role in motivating some banks to change their
overdraft policy.
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\5\ Chime. ``Overdraft With No Fees''. https://www.chime.com/
spotme/
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The key to understanding overdraft is that a small number of
customers account for the vast majority of overdrafts: 80 percent of
overdraft fees come from 9 percent of account holders. The same data
shows that one out of every 12 banked customers had ten or more
overdrafts a year, paying on average $380 a year in overdraft fees. \6\
For a person earning $38,000 a year, that is 1 percent of their annual
income spent in overdraft fees alone!
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\6\ Bakker, Trevor, Nicole Kelly, Jesse Leary, and Eva Nagypal.
``Data Point: Checking Account Overdraft''. Consumer Financial
Protection Bureau, July 2014. https://files.consumerfinance.gov/f/
201407-cfpb-report-data-point-overdrafts.pdf
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Heavy overdrafters are highly profitable customers, often producing
more profit than customers with more money in their account who manage
to not overdraw. For some banks, this makes them a desirable customer
set, so much so that a small number of banks have decided to specialize
in attracting these customers and maximizing their overdrafts, a point
I will get to later in my testimony.
Another note on heavy overdrafters involves debit cards and
regulation. Heavy overdrafters are likely to be heavy debit card users,
as payment form and income are highly correlated. \7\ As a result of
the compromise worked out during debate and passage of the Durbin
Amendment to the Dodd-Frank Act in 2010, small banks were essentially
given the ability to have a higher interchange fee on certain debit
card transactions relative to larger banks.\8\ \9\ When a fintech
partners with a small bank, they are able to earn the higher
interchange fee. This partnership is structurally able to generate more
revenue off debit card users than larger banks for the same activity.
Thus, fintechs can make more profit from the regular payments made by
overdraft-prone customers than larger banks.
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\7\ Klein, Aaron. ``How Credit Card Companies Reward the Rich and
Punish the Rest of Us''. L.A. Times, December 20, 2019. https://
www.latimes.com/opinion/story/2019-12-20/opinion-how-credit-card-
companies-reward-the-rich-and-punish-the-rest-of-us
\8\ 111th Congress. 15 U.S.C. 1693o-2, ``Reasonable Fees and
Rules for Payment Card Transactions''.
\9\ Hopkins, Cheyenne. ``Tester Touts Bill To Delay Interchange
Fee Limits''. American Banker, April 14, 2011. https://
www.americanbanker.com/news/tester-touts-bill-to-delay-interchange-fee-
limits
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A final point on heavy overdrafters: for them, basic banking is
expensive. The result is that many leave the banking system. As a
recent Consumer Finance Protection Bureau (CFPB) note was titled:
``Overdraft Fees Can Price People Out of Banking''. \10\ While being
unbanked is costly, there are times when nonbank services are actually
cheaper than banks. In fact, the high costs of banking is the number
one reason why people leave the banking system according to the Federal
Deposit Insurance Corporation (FDIC). \11\ Fixing the overdraft problem
is one of the most important things that can be done to help address
problems of the un- and under-banked.
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\10\ Valenti, Joe. ``Overdraft Fees Can Price People Out of
Banking''. Consumer Finance, March 30, 2022. https://
www.consumerfinance.gov/about-us/blog/overdraft-fees-can-price-people-
out-of-banking/
\11\ Kutzbach, Mark, Alicia Lloro, Jeffrey Weinstein, and Karyen
Chu. ``How America Banks: Household Use of Banking and Financial
Services''. Federal Deposit Insurance Corporation, October 2020.
https://www.fdic.gov/analysis/household-survey/2019execsum.pdf
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Overdraft fees vary substantially between banks. Banks have
structured their overdraft products very differently. As a result,
overdraft revenue varies substantially among banks, including among the
largest banks. \12\ To compare banks by overdraft revenue, I analyze
their overdraft revenue per consumer nonretirement deposit account.
\13\ This helps control for differences between banks by size while
focusing on their consumer account footprint. It elucidates the
substantial divergence in overdraft revenue, as some banks generate
overdraft of more than seven times other banks. It is hard to imagine
that among the Nation's largest banks the variation in their share of
heavy overdrafters is this drastic. Hence, there must be other
practices and products offered by these banks that allow some to
generate so much more overdraft revenue per customer than others. These
include how reordering payments by size, posting debits before credits,
and whether to allow overdrafts in certain instances like at ATMs.
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\12\ Baker, Todd H., and Corey Stone. ``Making Outcomes Matter: An
Immodest Proposal for a New Consumer Financial Regulatory Paradigm''.
SSRN, May 21, 2020. https://papers.ssrn.com/sol3/papers.cfm?abstract-
id=3607308
\13\ Author's calculation using FFEIC data. While FFEIC data is
governmental data filed by banks there may be some banks that have
certain types of consumer nonretirement deposit accounts that are
structurally different and less likely to overdraft. Note that Truist's
merger in late 2019 required some additional calculations.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A small number of small banks are overdraft giants. On a per
customer basis, a handful of smaller banks generate overdraft revenue
dwarfing the largest banks. These banks target heavy overdraft
customers and seek to maximize revenue from them. For example,
Woodforest branch in Atlanta is located in the Walmart Supercenter on
Gresham Road, SE, while Armed Services Bank targets customers located
primarily on military bases such as its operations on Moody Air Force
Base in Georgia. Compare the overdraft revenue per customer these banks
generate: often more than $100 per account each year, more than five
times the average of America's five largest banks. Because their
overdraft revenue per customer is higher they account for a
disproportionate amount of total overdraft. Woodforest National Bank
actually generates more overdraft revenue per year than Citibank.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
These banks have no business model besides overdraft. First
National Bank of Texas has made more than 100 percent of its profit on
overdraft in each of the last 7 years (that's as long as overdraft data
have been separately reported). For Woodforest and Gate City, that has
been true in six of the last seven. Armed Forces Bank has made more
than 75 percent of its profit on overdraft for each of the last 7 years
(and over 100 percent for three of the seven). Academy Bank made more
than 100 percent of its profit in overdraft fees for 4 straight years
from 2017-2020. I group Armed Forces and Academy Bank together because
they are part of the same holding company: Dickenson Financial Company.
This holding company's strategy appears to be based on overdraft. The
Federal Reserve regulates that holding company, while the Office of the
Comptroller of the Currency (OCC) regulates these banks, which are
nationally chartered banks. There may be more overdraft giants among
the banks regulated by the FDIC and National Credit Union
Administration (NCUA), as banks under $1 billion and all credit unions
are exempt from publicly disclosing their overdraft revenue. Regulators
have been asleep at the switch in allowing these banks to operate in
what are clearly unsafe and unsound business models, as they have been
losing money every year on all other aspects of banking other than
overdraft.
Shining the spotlight. The divergence in bank practices has gotten
the attention of policymakers, media, and bank executives. Members of
Congress, including several on this Committee, publicly engaged with
bank CEOs, \14\ regulators, \15\ and the media, \16\ raising questions
about outlier banks. Academics, consumer advocacy groups, and reporters
began digging in. This public pressure is part of the reason, I
believe, why some banks have decided the overdraft business is simply
not worth it. As some institutions began making pro-consumer changes,
the pressure increased for others. The industry started to move. As
Acting Comptroller Hsu put it in a speech a few months ago before the
American Bankers Association, ``You don't want to be the last bank that
still has a traditional overdraft program.'' \17\ Words like that from
regulators have meaning, even if they do not yet have a regulation
behind them.
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\14\ Bloomberg. ``JPMorgan's Dimon Clashes With Warren Over
Overdraft Fees''. May 26, 2021. https://www.bloomberg.com/news/videos/
2021-05-26/jpmorgan-s-dimon-clashes-with-warren-over-overdraft-fees-
video
\15\ Office of the Comptroller of the Currency. ``Acting
Comptroller Michael J. Hsu Remarks Before the Consumer Federation of
America's 34th Annual Financial Services Conference''. December 8,
2021. https://www.occ.gov/news-issuances/speeches/2021/pub-speech-2021-
129.pdf
\16\ CNBC Television. ``Sen. Elizabeth Warren on JPMorgan CEO
Jamie Dimon's Testimony.'' YouTube, May 26, 2021. https://
www.youtube.com/watch?v=DT4ojj-spoY&ab-channel=CNBCTelevision
\17\ American Banking Journal. ``OCC's Hsu: `You Don't Want To Be
Last' To Offer Traditional Overdraft Programs''. March 9, 2022. https:/
/bankingjournal.aba.com/2022/03/occs-hsu-you-dont-want-to-be-last-to-
offer-traditional-overdraft-programs/
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Overdraft Changes
Most of the Nation's largest banks and many smaller ones have
announced changes in their overdraft policy. Several eliminated the
product all together. Others instituted a set of changes designed to
reduce the number of overdrafts their customers experience. How banks
are reducing overdrafts shed significant light on the factors that
drove overdraft in the first place. The changes taken can be
categorized into four buckets. Each bucket is a type of change that
highlights a different aspect of the overdraft problem and how it can
be solved. The four buckets are:
1. Reducing fees
2. Changing time
3. Providing small dollar liquidity in different forms
4. Consumer empowerment
Before turning to each bucket, several top line observations.
Generally speaking, the less a bank relied on overdraft for revenue the
more likely they were to eliminate the product or cut fees by the
largest amount. Citibank and Capital One eliminated the product
entirely. While Bank of America did not eliminate overdraft, it pledged
to cut total overdraft revenue by 97 percent (although from a different
baseline). \18\ On the other end the changes announced by Regions and
Citizens Banks will reduce their overdraft revenue by only 23 and 28
percent respectively, despite each starting from a higher base. \19\
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\18\ Bank of America. ``Bank of America Announces Sweeping Changes
to Overdraft Services in 2022, Including Eliminating Non-Sufficient
Funds Fees and Reducing Overdraft Fees''. January 11, 2022. https://
newsroom.bankofamerica.com/content/newsroom/press-releases/2022/01/
bank-of-america-announces-sweeping-changes-to-overdraft-services.html
\19\ Kline, Allissa. ``Truist Joins Industry's Pivot Away From
Overdraft Fees''. American Banker, January 18, 2022. https://
www.americanbanker.com/news/truist-joins-industrys-pivot-away-from-
overdraft-fees
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Overall savings from this subset of fourteen banks that have made
changed overdraft policies is around $5 billion a year. \20\ If these
savings were distributed evenly across the country, on a per capita
basis, a State like Georgia would expect savings of $162 million a
year. This estimate is derived from various bank public statements
regarding their expectations of reduced overdraft fees coupled with
estimates based on announced policy changes for banks where I was
unable to find public statements regarding expected revenue lost. It
includes the largest banks plus several others who made announcements
and for which I was able to find data. \21\
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\20\ The banks included in this analysis are: JPMC, BoA, Wells
Fargo, Citibank, USBank, Truist, PNC, Capital One, USAA, TD Bank,
Regions, Citizens, Ally, and Frost. All sources are cited in the
author's calculations.
\21\ Sources for the overdraft revenue reductions include
conversations with individual banks and the following publications:
https://www.americanbanker.com/news/truist-joins-industrys-pivot-away-
from-overdraft-fees; https://www.capitalone.com/about/newsroom/
eliminating-overdraft-fees/https://seekingalpha.com/news/3789183-
regions-bank-is-the-latest-to-cut-overdraft-fees-to-keep-attract-
customers
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The savings are estimated from the 2019 base-year, given the
pandemic-related changes in overdraft revenue described earlier that
began in 2020, coupled with the reality that some banks who were early
announcers of overdraft policies have already seen revenue changes.
This estimate is more inclusive of than the CFPB's estimate of the
savings from banks eliminating nonsufficient funds fees (NSF) which
they estimated will save consumers $1 billion alone. \22\ It also
includes institutions that have made announcements since an earlier
estimate by Pew which found potential savings of $2 billion a year
based on changes from only the five largest banks. \23\ This estimate
does not include the potential offsetting costs borne by consumers who
end up in small dollar loans instead of being charged overdrafts. Those
interest costs will offset some of these savings and should be
monitored as these new small dollar loan alternatives are rolled out.
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\22\ Borne, Rebecca, and Ashwin Vasan. ``Consumers on Course To
Save $1 Billion in NSF Fees Annually, But Some Banks Continue To Charge
These Fees''. Consumer Financial Protection Bureau, April 13, 2022.
https://www.consumerfinance.gov/about-us/blog/consumers-on-course-to-
save-one-billion-in-nsf-fees-annually-but-some-banks-continue-to-
charge-them/
#:text=In%20recent%20months%2C%20a%20number%savings%20of%20about%20%241%
20billion
\23\ Horowitz, Alex, and Linlin Liang. ``America's Largest Banks
Make Major Overdraft Changes That Will Help Consumers''. Pew Research,
February 8, 2022. https://www.pewtrusts.org/en/research-and-analysis/
articles/2022/02/08/americas-largest-banks-make-major-overdraft-
changes-that-will-help-consumers
---------------------------------------------------------------------------
For the banks examined, policy changes already announced average
out to a reduction of just below 60 percent of total 2019 overdraft
revenue, although they vary significantly between financial
institutions. Several institutions that have made relatively small
changes to reduce overdraft fees will appear even larger outliers
relative to their peer group in coming years. Policymakers, regulators,
and the media should continue to carefully analyze overdraft policies
as not all changes will have the same impact.
If every bank and credit union made changes along this industry
average, savings for consumers would exceed $17 billion, based on the
Moebs estimate of $30 billion in total overdraft charges in 2019.
However, as noted above, that is unlikely absent regulatory or legal
changes given how dependent some institutions are on overdraft for
their business. Thus, while industry actions to date constitute a major
win for many working families--after all, the majority of people in
America have an account with a bank that has changed its policies--much
more can be done.
Reducing Fees
Among actions banks and credit unions can take to benefit
consumers, lowering the costs of overdraft is the most straightforward
and impactful. Overdrafts had generally been priced at about $35 each,
with institutions setting a maximum number of daily overdrafts (often
between four and eight). Many institutions charged a nonsufficient
funds fee (NSF) when certain payments could not be covered by the funds
in a consumer's account. NSF fees tended to be around the same size as
overdraft fees.
Changes observed: Most of the largest financial institutions have
eliminated NSF fees entirely. \24\ Some institutions have reduced the
$35 fee; notably Bank of America lowered it to $10, M&T to $15. This
has eliminated part of the punitive penalty aspect of the fee and is
one reason why Bank of America expects such a substantial decline in
total overdraft revenue. Some have also reduced the maximum number of
overdraft fees charged per day.
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\24\ Horowitz, Alex, and Linlin Liang. ``America's Largest Banks
Make Major Overdraft Changes That Will Help Consumers''. Pew Research,
February 8, 2022. https://www.pewtrusts.org/en/research-and-analysis/
articles/2022/02/08/americas-largest-banks-make-major-overdraft-
changes-that-will-help-consumers
---------------------------------------------------------------------------
These changes are straightforward and will reduce the cost borne by
consumers. Elimination of NSF fees is particularly important as these
were sometimes a double whammy, hitting a consumer on top of the
overdraft fee, making the true cost of a negative balance event greater
than $35.
Insight revealed: Overdraft fees do not reflect the cost to the
financial institution of providing overdraft coverage. The fee was
often designed to have a punitive element to discourage consumers from
going negative. \25\ Charging penalty fees for overdrafts may have been
designed at one point to reduce frequency, but given the illiquid
nature of the customer at the moment they run out of money, it became a
way to generate more profit for a financial institution. Given the high
cost of alternative small dollar credit and the consumers' frequent
lack of awareness that they were even overdrafting, the fee was able to
stay quite high.
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\25\ United States Senate Committee on Banking, Housing and Urban
Affairs. ``Testimony of Michael Calhoun, Center for Responsible
Lending''. November 17, 2009. https://www.banking.senate.gov/imo/media/
doc/CalhounTestimony111709.pdf
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Changing Time
Overdraft is as much or more about running out of time than out of
money. The reason people go negative in their bank account temporarily
has a lot to do with the mismatch in time between when they have access
to their money and when their payments are debited from their account.
They are often minutes, hours, or days away from having the money
necessary to cover the overage. In addition, some customers have
positive balances able to cover the cost when they make a purchase, but
because of the time delay in settlement, other payments have been
processed before this purchase. This results in a ``positive when made,
negative when settled'' scenario in which a consumer was shown that
they had the money in their account when the payment began but ended up
being charged an overdraft.
These problems are exacerbated by America's antiquated payment
system, which still runs on technology that is decades old. In this
system, payments are often credited and debited in batches rather than
individually when they occur. A batch system is analogous to a washing
machine in which all the clothes go in together, regardless of when
they were soiled, and come out clean at the same time. The person doing
the laundry then decides when to fold and return the clean clothes,
much like the bank has some discretion on which order to post the
various debits and credits that come through the payment cycle.
Changes observed: Many banks have created grace periods where
consumers who cure an overdraft within 24 to 48 hours or more are not
charged a fee (PNC, Wells Fargo). In addition, many banks have moved up
consumers' payday, crediting accounts with direct deposit up to 2 days
earlier (Capital One, Regions). This is a valuable service to customers
because direct deposit is not instant. Typically, a direct deposit that
is withdrawn from a business on Tuesday does not become available to
the worker until Friday. Banks with direct deposit relationships often
know the amount of money their customer will receive and are able to
provide access to those funds earlier. Some banks have also eliminated
any overdraft fees incurred if a charge was made when the account had
funds but settled negative (JPMC).
Insight revealed: Time is money. The provision of extra time has
had a substantial impact. PNC, which was among the first banks to
change overdraft fees, has been able to collect some data from their
changes which they term ``Low Cash Mode.'' 63 percent of PNC customers
who end the day with a negative balance are able to fix the problem and
avoid an overdraft. \26\ The average time to cure is only 13 hours,
evidence that the majority of their customers' problems are very short-
term mismatches. From PNC's experience, 75 percent of reduction in fees
was the result of extra time and the change on the limit on total
overdrafts. The remaining 25 percent of savings came from the
elimination of NSF fees.
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\26\ Data provided to the author, available upon request.
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Overdraft fees are driven in large part by short temporal
mismatches in income flows. The provision of short time windows to cure
is very impactful. This helps explain the popularity of early wage
access and other faster payment options spreading through the banking
and fintech systems. It also makes clear the incredibly high cost of
our Nation's slow payment system born by American families living
paycheck to paycheck. The failure of the Federal Reserve to speed up
our payment system has taken billions out of the pockets of working
families and stuffed it in the bottom line of banks, credit unions,
check cashers, and payday lenders. \27\ Faster payments ought to be
among our top priorities.
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\27\ Klein, Aaron. ``Why Don't Checks Clear Instantly? Ask the
Fed''. Politico, September 28, 2016. https://www.politico.com/agenda/
story/2016/09/financial-technology-payment-transactions-federal-
reserve-000209/
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Small Dollar Liquidity in Different Forms
Economically, overdraft is a form of small dollar credit. Charging
a fixed price instead of an interest rate does not change that basic
fact. Legal and regulatory structures deemed overdraft a fee instead of
a loan, avoiding a set of legal requirements like Truth in Lending that
requires disclosures, including the annual percentage interest rate
(APR). APR's for overdrafts may or may not be useful concepts, but they
would appear astronomical for covering a tiny overdraft, as one story
reports $100 overdraft fees for covering an overdraft of 2 cents. \28\
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\28\ Lieber, Dave. ``Why Are Some Big Banks Getting Rid of
Bounced-and-Check and Overdraft Fees?'' The Dallas Morning News,
February 17, 2022. https://www.dallasnews.com/news/watchdog/2022/02/17/
why-are-some-big-banks-getting-rid-of-bounced-check-and-overdraft-fees/
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The differentiation between a fee and a loan is important for legal
purposes, but economically the concept of a financial institution
providing money to a consumer and in exchange being repaid in the
future is the same. This is the provision of credit. How that credit is
priced can be spliced in different forms. In the case of overdraft,
which is almost always relatively small dollar amounts paid back
quickly, a representation of costs over the time horizon of a year will
would be equivalent to mammoth APR rates.
Changes Observed: Most banks making changes in policies have
increased the amount a consumer can go negative without incurring a
fee. Many have raised their limits from $5 to $50 (US Bank, Huntington,
TD, and JPMC) while some have gone as high as $100 (Truist and Frost
Bank).
Another common change has been automatically converting negative
balances into installment loans rather than charging a fee. These loans
typically have a fixed charge for the amount borrowed. US Bank started
a similar product (Simple Loan) earlier that now charges $6 per $100
borrowed. The loans typically last a few months and are paid back in
even, amortizing payments. Institutions typically make repayment
automatic but say they will not take such payment if it then causes a
new overdraft.
Insight Revealed: Heavy overdrafters go negative many times
throughout the year. Solutions require standing facilities of small
dollar credit that meet their needs. Increasing the ``grace zone'' of
negative balances without any costs is a major win for consumers. It
also recognizes the reality that for people living near the zero lower
balance of their bank account it can be impossible to know exactly how
much money you have in your account and when your debits and credits
will clear.
Changing from a fee-per-transaction when a customer's balance is
negative into one loan where costs are based on amount borrowed, not
number of transactions, is another win for consumers. Frankly, it may
be a more fair product for the lender as well, as the costs/risks of
default are related to the total amount, not the number of
transactions.
Simple fees based on amount borrowed are easier to understand and
consider for consumers. Separating the cost from the time horizon of
the loan is also different from traditional loans with fixed interest
rates on outstanding balances. Fees on the order of 5 percent of amount
borrowed are substantially lower than most alternatives available to
heavy overdrafters for small dollar credit. However, fees on the order
of 10 percent or higher can reach high costs if the funds are repaid
quickly. For example, $10 to borrow $100 that is paid back over 6 weeks
approaches a 100 percent APR.
Total savings to consumers from changes to overdraft fees may be
somewhat offset by interest and other costs of small dollar lending.
No-cost temporary negative balances are different than interest-bearing
loans. Both can be beneficial for consumers, but a full accounting of
total savings from overdraft fee changes should include the
corresponding costs associated with small dollar credit products that
are being rolled out as alternatives to overdraft.
Consumer Empowerment
People do not know how much money is in their bank account or when
exactly payments are being made, and even if they do they may lack the
ability to stop automatic payments. Providing consumers increased
knowledge of their situation and the ability to decide whether to stop
or delay an automatic payment would empower consumers to decide whether
the ``overdraft was worth it.''
Changes observed: Many banks have developed sophisticated systems
designed to alert consumers of low balances and provide the ability to
delay or stop payments (PNC, TD). Some of these systems provide
proactive alerts to customers when their balance reaches a threshold
(``$50 left in your account'') while others indicate an automatic
payment is coming that would create an overdraft. Consumers can then
use this information to decide how to manage their finances and
potentially avoid an overdraft.
Insight revealed: Knowledge is power. Consumers should know their
bank balance and have the ability to decide whether an overdraft fee is
worth the consequences of not making the automatic payment. However,
cancelling an automatic payment may itself result in fees and charges
from the other entity (late fees, NSF fees for attempting to get paid,
delinquency notifications for credit reports, etc.). Banks making
changes to their policies cannot be responsible for how the other party
will respond. Consumers may not know that either.
While consumer empowerment sounds good, it is not as impactful. PNC
estimates that only about 1 percent of payments were cancelled or
delayed by customers receiving this alert. This may be evidence that
customers want these payments to move forward regardless of overdraft
consequences or that they know they will have enough money to cover the
payment given that PNC's new product allows extra time to cure the
overdraft. It is hard to know how many of the consumer alerts sent
resulted in changed behavior without a complicated control group-style
experiment.
It is hard to argue against providing consumers more information.
However, information without the ability to fix a problem is often
insufficient. The problem people living on the financial edge face with
overdraft is more likely a combination of temporal mismatches of money
and the high cost of small dollar credit than it is about knowing that
they are near the edge. Data from the Financial Diaries Project and
others indicate that people living paycheck to paycheck may be more
likely to budget and be aware of their finances than those who are
comfortably upper middle class. \29\ However, when you do not know the
exact moment your paycheck will hit your bank account or when a payment
will be taken out it is impossible to budget or plan in a way to avoid
fees.
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\29\ Morduch, Jonathan, and Rachel Schneider. ``The Financial
Diaries: How American Families Cope in a World of Uncertainty''.
Princeton University Press, 2019.
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Policy Solutions
Many banks have made great strides to reduce overdraft fees, some
more impactful than others. These banks' excellent decisions do not
eliminate the need for structural policy changes. Here are five policy
changes still needed to address ongoing overdraft problems that harm
working families.
1. Stopping overdraft giants with safety and soundness regulation.
A small number of banks and credit unions depend on overdrafts for a
majority, or in a few instances, totality of their profits. That
regulators consider it safe and sound for banks and credit unions to
base their business model on overdraft, a product charged only to their
most financially vulnerable customers, is a dereliction of duty.
Regulators should immediately revise their rules. Any institution that
relies on overdraft fees for a majority of their profits for multiple
consecutive years should be given failing regulatory grades, a position
the Washington Post editorial board has echoed.
2. Credit unions should disclose overdraft data just like banks.
Currently all banks over $1 billion in size must file information in
their call reports listing various consumer fees, including overdraft
fees. \30\ These items in Schedule RI, line 15, form the basis of the
data I and others have used to highlight trends in industry, identify
troubling practices and overdraft dependent institutions, and encourage
the banking industry to reform. Credit unions are exempt from this
requirement. As such, even the Nation's largest credit unions with tens
of billions in assets do not file this information publicly. No one
knows which credit unions are overdraft giants or are engaged in
practices harming their customers, although the data described above
and a few lawsuits have revealed there are problems. \31\ Credit unions
should report this data publicly, just like banks of similar size.
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\30\ Federal Financial Institutions Examination Council. ``FFIEC
031 and FFIEC 041 Call Report''. December 29, 2014. https://
www.ffiec.gov/pdf/ffiec-forms/FFIEC031-FFIEC041-20141229-fi-draft.pdf
\31\ Tompor, Susan. ``2 Big Michigan Credit Unions Hit With
Lawsuits Regarding Overdraft Policies''. Detroit Free Press, September
17, 2017. https://www.freep.com/story/money/personal-finance/susan-
tompor/2017/09/17/overdraft-fees-class-action-credit-unions/401149001/
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3. Real-time payments. As Treasury Secretary Yellen recently
stated, America's slow payment system ``contributes to the use of high-
cost check cashers or `pay day' lenders to get their money in time to
pay their bills. Some are forced to draw against already low balances
and are charged overdraft fees.'' \32\ She was right to draw this link.
My research, using FDIC data, makes clear that 70 percent of people
using check cashers have bank accounts. \33\ The problem Americans face
is that the check takes too darn long to clear!
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\32\ United States Department of the Treasury. ``Remarks from
Secretary of the Treasury Janet L. Yellen on Digital Assets'', April 7,
2022. https://home.treasury.gov/news/press-releases/jy0706
\33\ Klein, Aaron. ``Can Fintech Improve Health?'' The Brookings
Institution, September, 2021. https://www.brookings.edu/research/can-
fintech-improve-health/
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Voluntary decisions by some institutions to offer new programs--
including faster access to certain types of payments (generally direct
deposit wages) and 24 to 48 hours to cure negative balances--and a
growing industry providing early wage access have all helped millions
of American families avoid expensive overdrafts and other fees. That
some banks and fintechs help their customers with these services only
underscores the importance and power of broader payments reform. If a
subset of banks moving a subset of payments faster can result in
billions of dollars saved by families living paycheck to paycheck,
consider the impact of a full transition to real-time payments.
The solution is real-time payments. The Federal Reserve could solve
this problem today using the regulatory authority given to it under the
Expedited Funds Availability Act. \34\ But the Fed has not moved even
though Congress was explicit in requiring that the Fed ``shall, by
regulation, reduce the time periods established under subsections (b),
(c), and (e) to as short a time as possible''. Absent Fed action,
legislation is needed. Previously proposed legislation introduced in
the Senate by two leading Members of this Committee, Senators Van
Hollen and Warren would solve this problem. \35\
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\34\ Klein, Aaron. Open letter to Ann Misback, Secretary of the
Board of Governors of the Federal Reserve System. The Federal Reserve,
December 14, 2018. https://www.federalreserve.gov/SECRS/2018/December/
20181221/OP-1625/OP-1625-121418-133277-428769914666-1.pdf
\35\ 116th Congress. Payment Modernization Act of 2019.
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If Congress wants to address inequality, the most impactful change
I can think of that does not raise taxes or Government spending would
be to require immediate posting of all deposits under $5,000 by all
banks. Make this happen and save American families billions in
overdrafts, check cashing fees, payday lending fees, late fees, and
other problems caused by our slow payment system.
4. Smarter payments regulation. A series of tricks allow some banks
and credit unions to increase overdraft revenue in part by taking
advantage of the slow payment system. Two of these can be ended through
joint regulation: posting debits before credits and reordering payment
flows from largest to smallest. When payments come in a batch, which is
common in our current payment system, the financial institution working
with its core processor has some discretion in how it posts payments.
The best practice for the consumer would be to post all of their
credits first and then start debiting their account. A recent study by
the CFPB found that almost 90 percent of banks and two-thirds of credit
unions did this. \36\ However, that left one-third of credit unions and
10 percent of banks posting some debits before credits, a practice that
would result in more consumers overdrafting. This should be stopped.
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\36\ Kelly, Nicole, and Eva Nagypal. ``Data Point: Checking
Account Overdraft at Financial Institutions Served by Core
Processors''. Consumer Financial Protection Bureau, December 2021.
https://files.consumerfinance.gov/f/documents/cfpb-overdraft-core-
processors-report-2021-12.pdf
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The same study found that while nearly two-thirds of credit unions
ordered the credits chronologically, only 22 percent of banks did.
However, larger banks were more likely to order chronologically, with
46 percent banks over $2 billion in size doing so. The study found a
concerning 40 percent of banks in the sample reordered from largest
payment to smallest, a trick that would result in more overdrafts. Less
than 1 percent of credit unions did this trick. To be fair, 44 percent
of banks and almost 10 percent of credit unions reordered from smallest
to largest, which should minimize overdrafts. Many financial
institutions are doing the right things and should be acknowledged as
such. Regulation is still needed as there are also many institutions
doing the wrong thing. Hopefully institutions who are doing the right
thing by their customers would be supportive of their best practices
being mandated across the industry.
5. Universal Bank-On-style accounts. All financial institutions
should be required to offer a no overdraft, low-cost, basic bank
account. \37\ These accounts have proven to be popular when properly
offered and marketed (see Citibank reporting one in five new customers
opening one) and can be done in a way that is profitable for the
financial institution. The American Bankers Association calls it a best
practice for all banks to offer this type of account. This best
practice should be mandated for all banks and credit unions. Draft
legislation proposed in the House would do so for all banks and credit
unions above $10 billion and this legislation would make a major
positive difference in addressing the problems of un- and under-banked
Americans. \38\ It does so with no additional Government spending or
costs imposed on financial institutions, many of which already offer
these accounts. Given the importance of small banks and credit unions
in reaching all Americans, I think all financial institutions should be
required to offer these accounts. After all, all banks and credit
unions are chartered by the Government and have a duty to serve their
communities. Providing a basic, low-cost account that is accessible to
all community members should be a part of that obligation.
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\37\ Klein, Aaron, and Myrto Karaflos. ``Universal Bank Accounts
Necessary for Families To Bank on Child Tax Credit''. The Brookings
Institution. April 29, 2021. https://www.brookings.edu/opinions/
universal-bank-accounts-necessary-for-families-to-bank-on-child-tax-
credit/
\38\ United States House of Representatives. ``Expanding Access to
Affordable Bank Accounts Act''. March 28, 2022. https://
financialservices.house.gov/uploadedfiles/033022--bills-117pih-
expandingaccesstoaffordable-u1.pdf
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Universal accounts expand access to the financial system. The
number one reason why people are unbanked is the high cost of basic
bank accounts. Approximately half of people without bank accounts
report having had an account in the past, highlighting that people
leaving the banking system are driven by the high cost of accounts.
Requiring no-overdraft accounts will help better meet the needs of
lower-income consumers.
Conclusion
America's largest banks and others around the world have made many
sweeping changes to their products that will substantially reduce usage
of overdrafts and overall cost of banking for consumers. These changes
will likely save American consumers $5 billion a year, putting money
directly in the hands of people who are living on the financial edge.
The banks and credit unions who have made these changes should be
commended and more should follow suit. It is not easy for a company to
change in a way that reduces its immediate profits but improves the
lives of its customers. This behavior should be rewarded.
The less a bank depends on overdraft revenue the more likely it is
to give it up. A handful of banks and credit unions operate on business
models entirely dependent on overdraft revenue for their viability.
Financial regulators must no longer tolerate this. They should never
have tolerated it in the first place. The market has moved; regulators
need to adapt.
The explosive growth and popularity of overdraft as a product
reveals deeper structural problems with America's basic banking system.
Slow payments, limited options for small dollar liquidity, and fees
designed to be punitive rather than in accordance with actual costs are
core reasons why overdraft became so widely used. These problems drive
people out of the banking system and take billions from working
families living paycheck to paycheck.
The positive changes by banks on overdraft fees are a step in the
right direction. But they do not address the underlying problems.
Congress has the ability to fix many of these problems and deliver a
financial system that works better for working people. Critically, many
of these solutions, like real time payments, do not require raising
taxes or new Government spending or new programs. That a person ought
to have access to their own money immediately should be a bipartisan
ideal.
I appreciate the opportunity to testify before the Committee and
look forward to answering your questions.
______
PREPARED STATEMENT OF JASON WILK
Founder and Chief Executive Officer, Dave
May 4, 2022
Good afternoon, Chair Warnock, Ranking Member Tillis, and
distinguished Members of the Subcommittee. Thank you for inviting me to
participate in today's hearing.
The topic of the hearing aligns closely with the story of Dave.
First and foremost, Dave is a technology company building financial
solutions to serve everyday Americans and working families who are
struggling with some or all aspects of their financial lives.
Dave is a powerful app designed to unlock fair financial services
for the 170 million Americans who need it most, the financially
vulnerable and the financially coping. Our mission was and is to build
a superior banking solution for anyone living paycheck to paycheck.
By estimates, there are 35 million people who are financially
vulnerable, struggling with every aspect of their financial life. These
are individuals who overdraft 10 to 20 times per year, are reliant on
single-pay credit, and need help building credit and finding new work
opportunities. \1\
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\1\ Financial Health Network's 2021 Financial Health Pulse Report.
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Additionally, there are approximately 131 million Americans who are
financially coping, struggling with some but not all aspects of their
financial life. This group is overdrafting several times per year,
needs help building credit, and needs access to affordable short and
long-term credit, savings and investing advice. \2\
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\2\ Ibid.
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Our goal, in 2017, was to disrupt overdraft, a proven pain point
for the financially vulnerable and the financially coping. Americans
pay more than $30 billion annually in overdraft fees to traditional
banks, with the typical transactions causing overdrafts being those to
buy gas and groceries. \3\ I myself was a victim of significant amounts
of overdraft fees when I was in college and following school--
especially with my second business where my initial salary was capped
at $30,000 a year, living in San Francisco and having to travel back to
Los Angeles. As you can imagine, that's a challenging salary to live
off of and I was consistently hit with high overdraft fees while living
on couches. And if it was happening to me--as somebody who grew up in a
middle class family--then I can only imagine the impacts as you move
down the income scale, especially moving into predominantly minority
and lower income communities.
---------------------------------------------------------------------------
\3\ Tara Siegel Bernard. 22 June 2021. ``Banks Slowly Offer
Alternatives to Overdraft Fees, a Bane of Struggling Spenders'', New
York Times.
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Against this backdrop, we started by building a simple app allowing
customers to link their existing bank account to our financial insight
tool to help customers understand what bills are coming up that could
lead to an overdraft in their bank account. This service is
increasingly useful in a world with so much tied to auto pay and direct
debit, which makes it difficult to keep track of which bills could
cause us to go negative. With our ``insights,'' through a little head's
up, customers had the ability to prevent a water, power, or Netflix
bill triggering a $34 overdraft fee. \4\
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\4\ CFPB Director Rohit Chopra. 01 Dec 2021. ``Prepared Remarks of
CFPB Director Rohit Chopra on the Overdraft Press Call''. ``Most
financial institutions charge a fee, typically around $34, for this
service.''
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We realized early on--and also based on my own personal
experience--that consumers are primarily using overdraft knowingly, as
a form of overpriced short-term credit. I relied on overdraft to fill
my gas tank. I relied on overdraft to buy groceries. I did not see a
payday loan or a high interest credit card as a viable option. I also
recognized that I only really needed $50 to $100 to get by until a
paycheck hit.
With this in mind, we sought to find a better option than
traditional and expensive overdraft to address the smaller dollar,
short-term liquidity needs of our customers that were triggering
overdraft fees. Our solution was to offer our customers instant,
interest-free liquidity, up to $250, whenever they need it to buy those
everyday essentials without incurring high overdraft fees. Millions of
customers now access our ExtraCash service. We estimate consumers have
saved over $1.5 billion in overdraft fees, with $50 million in
ExtraCash transactions delivered. \5\
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\5\ Dave Analyst Day. 25 Mar 2022. ``Dave users have taken over
$45M of overdraft protection advances, typically avoiding about $35
overdraft fee from their legacy bank. Dave Users have recorded in
aggregate $300-400M/year in fees from their legacy banks in 2019-
2020.''
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Our customers can also open a Dave Bank account, which we launched
in December 2020 through a partnership with Evolve Bank & Trust. Dave
Banking comes with no minimum balance fees or overdraft fees, real-time
spend alerts, and the ability for our customers to access their
paycheck up to 2 days early.
Lastly, we're the first fintech to help customers put money in
their pockets by tapping into the gig economy through our ``Side
Hustle'' capability. This product helps customers apply to additional
side income opportunities from Uber, Instacart, DoorDash, Lyft, and
other partners. We have facilitated nearly three million applications
for work since this launched, in 2019, helping our members generate
millions of dollars in incremental income. \6\
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\6\ Ibid. ``2.9M+ job applications submitted since Sept. 2020.''
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As you can see, at Dave, we are constantly striving to add services
and functionality to our product set to improve our customers'
financial health. Through our innovation practices and determining the
pain points for the everyday consumer, we anticipate that we will
continue to add additional tools to help improve the financial lives of
our customers. To that end, later this year we plan to add yet another
option to improve the financial life of our customers--allowing them to
build their credit when using Dave for some of their regular
transactions.
At the end of the day, Dave stands for the everyday person; the
everyday mom or dad who make up the backbone of today's working family.
We realize that overdraft--as a short-term solution for the next tank
of gas or bag of groceries--is critical to millions of Americans. But
traditional financial services failed to deliver a fair product. At
Dave, we're working to level the financial playing field for those who
need it most.
Thank you again for the invitation to appear before you. I look
forward to answering your questions.
______
PREPARED STATEMENT OF DAVID POMMEREHN
Senior Vice President and General Counsel, Consumer Bankers Association
May 4, 2022
Chairman Warnock, Ranking Member Tillis, and Members of the
Subcommittee, I am David Pommerehn, General Counsel at the Consumer
Bankers Association (CBA) and I appreciate the opportunity to testify
at today's hearing. In my two decades within the financial services
industry, I have worked to promote consumer choice and for the
establishment of products that meet consumers' needs, including
overdraft services. CBA is the voice of the retail banking industry
whose products and services provide access to funding for millions of
consumers and small businesses. Our members operate in all 50 States,
serve more than 150 million Americans, and collectively hold two-thirds
of the country's total depository assets.
With ongoing financial difficulties due to the pandemic, the
average American is struggling to ensure they have access to the
necessities their families need. From gas to get to work, to groceries
to feed their children, people need access to emergency liquidity at
increasing rates. According to the Federal Reserve, nearly half of all
American adults say they cannot cover an unexpected expense of $400.
Similarly, Bankrate states ``63 percent of American adults say they are
unable to pay an unexpected expense with their savings.'' The Financial
Health Network (formerly the Center for Financial Services Innovation)
study found that more than a third of all households say they
frequently or occasionally run out of money before the end of the
month. \1\
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/publications/2021-economic-
well-being-of-us-households-in-2020-dealing-withunexpected-expenses.htm
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Banks are aware of these challenges and work diligently to provide
access to safe and affordable products to U.S. consumers. The demand
for overdraft services is based largely on customer need and choice and
for many, is the last viable source of short-term liquidity. In recent
years, various groups have examined how consumers use overdraft
services. Some have concluded overdraft services are inherently bad for
consumers. These studies have largely assumed a reasonable consumer
would avoid overdraft and institutions providing overdraft services
must therefore be ``tricking'' consumers. These assumptions are
fundamentally flawed. The overdraft product is based on clear
disclosures and personal experience. The decision to proactively opt-in
and utilize the overdraft product is solely up to the customer.
The regulatory framework that governs overdraft services for point-
of-sale (POS) and ATM transactions clearly acknowledges the role of the
consumer to make informed, individual choice about what is best for
their personal financial well-being. In 2010, significant changes were
added to the law on POS and ATM overdraft services to increase
transparency and improve disclosures. \2\ Since the implementation of
these reforms, consumers must affirmatively opt-in to overdraft
services for POS and ATM withdrawals and debit card purchases, and they
receive numerous written disclosures concerning their right to revoke
the decision to opt-in at any time, including an account statement
disclosure whenever they incur an overdraft fee. Consumer choice is
central to the functionality of the overdraft product, allowing for
maximum transparency. This is contrary to recent statements made by the
Director of the Consumer Financial Protection Bureau (CFPB or Bureau)
and other policymakers that have likened overdraft services to ``junk
fees'' that are not properly conveyed to consumers. Statements that
overdraft fees are hidden and that consumers do not choose to use them
present an inaccurate and misleading depiction of the product.
---------------------------------------------------------------------------
\2\ The Electronic Funds Transfer Act, 15 U.S.C. 1693, et seq.,
and its implementing regulation, Regulation E, 12 CFR Part 1005,
administered by the Bureau, regulates mandatory overdraft service opt-
in for checking accounts. The Truth in Savings Act, 12 U.S.C. 4301 and
its implementing regulation, Regulation DD, 12 CFR Part 1030, requires
banks to provide to consumers disclosures about terms and costs of
deposit accounts fee disclosures in checking accounts.
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The Risks of Restricting Overdraft
The restricting overdraft services would create complex challenges
for consumers, service providers and merchants. For consumers,
restrictions on overdraft services would reduce access to an emergency
safety net on which many Americans rely. Further, merchants and service
providers would be forced to deny the transaction, creating a loss of
income from a given sale of goods or services.
Consumers would still incur insufficient funds fees, which in most
cases are equal to the fee charged for an overdraft. In addition, if
the bank or credit union does not cover the transaction, the customer
may incur a returned payment fee imposed by the payee or merchant,
resulting in additional fees in the form of late and/or interest
related fees. In the end, the consumer may pay more in fees than if the
bank had covered the item using overdraft services. \3\
---------------------------------------------------------------------------
\3\ Note that this is only true for checks and ACH transactions.
It is not true for ATM and debit card transactions for customers who
did not opt-in. Those transactions are declined at point of sale with
no NSF fee.
---------------------------------------------------------------------------
Returned items can also result in nonmonetary costs for consumers.
After imposing a nonsufficient funds fee (NSF), the merchant may also
report that event to a credit bureau which can adversely affect the
consumer's credit score. The NSF fees can vary by merchant transaction
and depend upon when the check or transaction is cleared or posted to
the consumer's financial institution. When given an option, many
consumers would prefer having their purchase paid for and not returned
since merchant NSF and associated fees can be higher than fees for
overdraft services. Restricting the availability of overdraft services
may also cause some consumers to switch to nonbank lenders who are less
equipped to provide them with a suite of suitable financial products
services, such as a significantly less regulated payday lender or check
casher. Additionally, these institutions do not abide by the same broad
Federal oversight as banks, depriving consumers of the high level of
regulatory protection they deserve.
Regulatory Acknowledgement
In December 2021, Office of the Comptroller of the Currency's (OCC)
Acting Comptroller Michael Hsu recognized overdraft services as one of
the last viable sources of short-term liquidity for many U.S.
consumers. In his remarks, Acting Comptroller Hsu commented on the
state of the overdraft market in the United States, highlighting the
important need to provide safe and affordable short-term liquidity
options for consumers within the well-regulated, well-supervised
banking system. \4\
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\4\ Acting Comptroller Michael J. Hsu Remarks before the Consumer
Federation of America's 34th Annual Financial Services Conference
(December 8, 2021)--``Reforming Overdraft Programs To Empower and
Promote Financial Health''--https://occ.treas.gov/news-issuances/
speeches/2021/pub-speech-2021-129.pdf.
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Recognizing the OCC's intent to protect financially vulnerable
Americans, Hsu commented while some banks have eliminated overdraft
from their financial suite, widespread adoption of this practice may
yield unintended consequences. He stated: ``limiting overdrafts may
limit the financial capacity for those who need it most,'' noting the
import benefit overdraft services can provide to consumers. CBA agrees
with the Acting Comptroller and encourages other policymakers to
undertake a comprehensive review of the overdraft market before
promulgating changes that may have adverse effects for consumers.
Additionally, On April 27, 2022, commenting on recent bank-led
overdraft innovations while testifying before the House Financial
Services Committee, CFPB Director Rohit Chopra stated: ``This is one of
the beauties of a competitive market. When there is real competition [
. . . ] people can benefit across the board.'' Director Chopra
understands the market is self-regulating and that banks are
proactively removing or significantly decreasing these fees to ensure
the retention of consumers.
Consumer Demand Leads to Change
Well informed and technically savvy consumers drove recent changes
to overdraft. Driven by a commitment to meeting evolving consumer
demands, America's leading banks have unveiled innovative financial
tools to provide consumers more choice and flexibility to avoid
unintended fees.
In December of 2021, Curinos, a global data intelligence firm,
released its ``Competition Drives Overdraft Disruption'' study
(Appendix A), which found consumers make highly informed choices about
who they bank with and when to use overdraft services. \5\ These
decisions are based on real-time access to account information, clear
disclosures and personal experience.
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\5\ Curinos, Competition Drives Overdraft Disruption (December
2021)--https://curinos.com/insights/competitiondrives-overdraft-
disruption/--attached hereto as Appendix A. This study was initiated at
the request of the CBA to fill a research gap in better understanding
consumer sentiment, and CBA provided funding for the market research
survey. Curinos independently designed, analyzed, and documented the
research results.
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Accordingly, a growing number of America's leading banks have
unveiled new innovations designed to avoid overdraft fees or have an
overdraft product with features selected by the consumer (Appendix B).
Banks have proactively implemented new overdraft polices that benefited
consumers use of the product that include: the elimination of overdraft
fees, the elimination of account transfer fees to coverage overages, de
minimums exceptions to cover small overages (i.e., avoiding an
overdraft trigger after purchasing a cup of coffee), grace periods for
customers to make accounts whole before overdraft fees are ever
assessed, access to small dollar loans (discussed more fully below),
eliminating extended overdraft fees, eliminating returned items fees,
real-time account updates and low balance notices. We believe these and
other changes, in conjunction with clear disclosures, add continued
benefit to consumers who rely on overdraft services to cover short-term
gaps in finances by continuing to provide a viable service at minimal
or no cost.
In many cases, these changes have also been accompanied by the
introduction of affordable small loans, serving as an additional
emergency safety net for consumers who are unable to cover an
unexpected bill with savings alone. Without access to a viable, bank
offered short-term liquidity product like overdraft, consumers will be
left with little recourse but to use less-supervised, less-regulated,
nondepository institutions to meet their needs--an undesirable position
to place vulnerable consumers.
Curinos Data--Consumers Understand Benefit and Value Overdraft
The Curinos research found the changes to bank overdraft service
programs is being driven more by competition instead of regulation and
the market rewards organizations that overhaul their existing overdraft
programs or develop alternative products. Institutions that are slow to
act are losing customers to more aggressive competitors. As a result,
financial institutions will continue to innovate and provide more low-
cost liquidity options, with or without regulatory changes.
Backed by Curinos' proprietary research, the report methodology
encompasses both consumers on the demand side and financial
institutions on the supply side. On the demand side, Curinos leveraged
an annual online consumer research study on checking account purchase
behavior of approximately 12,000 respondents, and a targeted online
consumer research study on overdraft behaviors. On the supply side,
Curinos utilized a review of disclosures and offers from 38 financial
institution websites, matching a 2015 Pew Study where possible, along
with an anonymized survey of behavioral data from 14 financial
institutions with $2 billion to $50 billion in total assets,
representing $637 billion of total U.S. consumer deposits. Findings
indicate consumer demand and intense competition within financial
services are driving recent changes in overdraft policies and programs.
Specifically, the study found:
Consumers understand overdraft: Consumers, especially
overdraft users, continue to demonstrate a deep understanding
of overdraft and available alternatives. More than 60 percent
of overdrafts come from consumers who intend to use the
service. More than 80 percent of overdraft transactions come
from consumers who opted into debit card overdraft programs
with the clear intention of using it to cover their payments.
And two-thirds of consumers indicate they will incur the cost
to ensure no reduction in their access to service.
Fewer people use overdraft: The percentage of regular
overdraft users (those with 10 or more transactions annually)
fell by 40 percent to 4.9 percent of the population between
2010 and 2020.
Consumers use overdraft for purchases of increased size:
Bank-led initiatives aimed to help consumers avoid an
unintended fee have dramatically reduced the number of small
purchases tied to overdraft. Since 2008, because of banks'
innovations, overdraft fees, per U.S. adult, have declined by
77 percent, with, the average size of purchases triggering
overdraft fees quadrupling from $50 to almost $200.
Consumers want more short-term liquidity choices: Consumers
seek convenient and relevant alternatives to overdraft. The
emergence of alternatives in the market is driving
consideration of new checking purchases.
Overdraft fee revenue is down significantly: U.S. overdraft
revenue fell approximately 57 percent from $40 billion in 2008
to $17 billion in 2019.
Challengers that adopt consumer-friendly policies, win
market share: New entrants, including fintechs and challenger
banks who have seen a dramatic increase in market share, have
created solutions to better manage or reduce the cost of
overdraft. These entities have experienced a 40 percent
increase in account acquisition since 2017. Financial
institutions that haven't adopted overdraft innovation have
experienced a nearly 30 percent reduction in consumer
acquisition.
These findings underscore the fact that, outside of overdraft, few
options remain for consumers to meet their emergency liquidity needs
within the well-regulated, well-supervised banking system. CBA has long
warned, and bank regulators agree, further restricting access to short-
term liquidity options, such as overdraft services, would drive many
families to predatory payday lenders and other expensive, less-
regulated venues. Accordingly, we urge policymakers to focus on the
consumer need, a complete market analysis, including the many changes
already in place, and take into consideration all the facts as they
consider future action. It is our commitment to provide every consumer
access to highly regulated financial products and services.
Small-Dollar--An Essential Solution to Emergency Liquidity Deficits
Access to reasonably priced small-dollar liquidity products is
essential to meeting consumer need with regards to cash shortfalls.
While various entry-level credit products exist to meet a wide range of
these needs, including traditional credit cards, personal loans, and
other forms of credit, some consumers unfortunately cannot qualify.
When debating policy affecting overdraft service, we urge
policymakers to also consider a viable solution to help consumers who
need short-term loan options--small-dollar lending. Today, the need for
accessible small-dollar, emergency credit for consumers has never been
greater and banks have been encouraged by policymakers to enter or
remain in the small-dollar lending market. In the past, banks worked
with regulators to develop products carefully designed to ensure strong
safeguards at reasonable prices. However, as highlighted in a recent
report for the Government Accountability Office (GAO), depository
institutions are hesitant to offer such loans in part because of the
changes to related rules or guidance in recent years. \6\ In
particular, some market participants have noted that banks do not want
to offer small-dollar products because they are expensive to develop,
and the regulations or supervisory expectations may change. The GAO
went on to note that from 2010 to 2020, the Federal Reserve, the
Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency issued or rescinded at least 19 actions
related to small-dollar loans, leading to continued regulatory
uncertainty.
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\6\ ``Banking Services: Regulators Have Taken Acton To Increase
Access, But Measurement of Actions' Effectiveness Could Be Improved'',
GAO (February 2022).
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Consumer demand still exists for a short-term loan product and, if
allowed, highly regulated banks can make safe, affordable, and easy to
access small-dollar loans to consumers in need.
The CFPB Fee Inquiry
Heavily shaping the current overdraft fee debate, on January 26,
2022, the CFPB issued a Request for Information Regarding Fees Imposed
by Providers of Consumer Financial Products or Services (RFI). \7\ In
the RFI, the CFPB seeks public feedback regarding fees, calling out
overdraft fees directly, that are not subject to competitive pricing to
assist the CFPB in exercising its authority to create fairer, more
transparent, and competitive consumer financial markets.
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\7\ https://www.lenderlawwatch.com/wp-content/uploads/sites/9/
2022/02/CFPB-Junk-Fees.pdf
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CBA has several concerns we would like to bring to the attention of
the Subcommittee. First, fee amounts and disclosures are subject to
numerous Federal and State laws. Second, fees are a necessity that
allows lenders to recoup operational costs, mitigate risk and can even
deter repeated use by a customer. Finally, by characterizing various,
disconnected charges as ``junk fees,'' the RFI serves to confuse
consumers and undercut the purpose and utility of disclosures that
regulators have worked so hard to police and implement.
Federal and State agencies routinely monitor the adequacy of
disclosures made to consumers about fees. The Bureau itself
consistently engages in enforcement actions where it believes entities,
including banks and other financial institutions, have failed to
disclose properly the fees associated with any consumer product.
Recently, the Bureau took enforcement action finding a financial
services company ``provided consumers with inaccurate or incomplete
information about the fees it assessed.'' \8\ The Bureau has been swift
to act where it perceives problems, with the agency's most important
and effective enforcement actions coming in directed, targeted efforts
to address the practices of individual bad actors, rather than
overbroad generalizations that sweep the entire industry into its
crosshairs.
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\8\ See ``In the Matter of JPay, LLC'', File No. 2021-CFPB-0006
(Oct. 19, 2021); https://www.consumerfinance.gov/about-us/newsroom/
cfpb-penalizes-jpay-for-siphoning-taxpayer-funded-benefits-intendedto-
help-people-re-enter-society-after-incarceration/.
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Whether you are a bank or a box store, businesses remain in
operation by the net revenues they receive by offering a product or
service and charging a fee for those products and services. Banks and
financial institutions are not the only place where consumers encounter
fees. The Federal Government regularly charges fees as a penalty or to
mitigate costs. A late payment to the IRS triggers a fee, a parking
ticket results in a fee, even State and local governments charge fees
for a variety of services. As the Curinos study showed, many consumers
are willing to incur a fee for the ability to use overdraft products
when making purchase decisions. Bank fees are highly disclosed and, as
previously mentioned, in the case of overdraft there is an ``opt in''
requirement that the customer must choose. An increasing number of
consumers look to disclosures to better understand how fees are applied
and, in some cases, how to make fees work for them as a daily function
of their financial decisions.
Congress charged the Bureau with enforcing Federal consumer law
consistently, ``in order to promote fair competition.'' \9\ With
individual financial institutions disclosing, fully and completely,
what their fee practices entail, consumers can make informed choices.
The Bureau itself provides information designed to help consumers
understand overdraft fees and comparison shop between different
financial institutions. \10\
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\9\12 U.S.C. 5511(b)(4).
\10\ See, ``Comparing Overdraft Fees and Policies Across Banks'',
by Rebecca Borne and Amy Zirkle (Feb. 10, 2022); https://
www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-
policies-across-banks/.
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Conclusion
Banks provide access to safe, well regulated, high-quality consumer
products and services, and have invested significant resources toward
innovating overdraft services for consumers' long-term benefit. We
encourage policymakers to work with all stakeholders to avoid any
unnecessary restraint on bank products or services by carefully
considering all the options available that could impede the ability of
those most in need of the tools they need to address their financial
needs. CBA appreciates the opportunity to provide our thoughts to the
Subcommittee and we remain eager to work with you on our shared
commitment to improve financial opportunities for all Americans.
Appendix A: Curinos 2021 Overdraft Study, ``Competition Drives
Overdraft Disruption''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix B: Bank Overdraft Innovations
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JASON WILK
Q.1. Consumer advocates have raised concerns over the ``tips''
model employed by overdraft and cash advance apps, calling them
``an attempt to mask finance charges, evade interest rate
limits, and hide overdraft fees.'' \1\ These apps are
increasingly soliciting ``voluntary'' tips from customers in
exchange for their service. However, while the tips may be
voluntary in name, these apps have been found to employ methods
aimed at pressuring customers to tip and making it difficult to
not tip. Additionally, some of these apps have been found to
have their voluntary tip model default at a certain dollar
figure. These individual default tip may appear relatively
small to customers each pay period, but can quickly add up to
high costs and interest rates equivalent to annual percentage
rates (APRs) as high as 520 percent, creating ``cycles of
debt.'' \2\ For this reason, tips provide companies like Dave
an opportunity to evade interest rate limits and other lending
laws. In order to better understand the tips model and how your
company utilizes it, I request answers to the following
questions:
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\1\ https://www.nclc.org/images/pdf/banking-and-payment-systems/
NCLC-comments-on-CFPB-Junk-Fees-RFI-87-FR-58015.2.22.pdf
\2\ Id.
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What percentage of users of the advance service tip?
A.1. The tipping option came out of our overall philosophy: to
find ways to build and offer products that banks won't. That's
why we started with no interest cash advance. If people like
the product, they have the option to tip. And we find the
numbers go up as people access the product more than once.
Approximately 64 percent and 75 percent of Members chose to
leave a tip for the 3 months ended March 31, 2022, and 2021,
respectively.
Q.2. What is the average tip, both in dollar amounts and in
percentage of the advance?
A.2. The average amount of tip Members chose to leave was
approximately $6.93 and $4.07 per advance for the 3 months
ended March 31, 2022, and 2021, respectively. We do not
calculate the tip as a percentage of the advance.
Q.3. How much is the average tip in APR terms?
A.3. The advances that Dave makes are nonrecourse and a
majority are fully repaid by the Member by their next pay
period. As such we do not calculate an APR on tips and believe
that APR is not a fair representation of the total cost of
capital.
Q.4. How much have you collected in tips in the past year, and
what percentage of your revenue comes from consumer tips?
A.4. Tips for the 3 months ended March 31, 2022, were
approximately $13.9 million. We do not publicly disclose what
percentage of our revenue is generated through tips.
Q.5. What percentage of consumers request advances pay express
fees, and what percentage of your revenue come from express
fees?
A.5. In terms of delivery of the advances, users can opt for
free advance, which takes 1-3 days, or an optional express fee
for faster delivery. The expedited transfer fee ranges from
$1.99 to $5.99, depending on the size of the advance taken. The
average is around $5. While use of the expedited transfer is
entirely optional, nearly all customers do choose it. This fee
is similar to other financial products that involve fund
transfers, including those offered by Paypal and Venmo.
Q.6. How much have you collected in express fees in the past
year?
A.6. We do not publicly disclose this information. We are happy
to discuss this or other questions in more detail with you or
your staff.
Q.7. Do you treat consumers who do not tip differently in any
way?
A.7. We do not treat Members who choose not to tip differently.
It is completely optional and there is no difference in service
or access to services for those who choose not to tip.
Additional Material Supplied for the Record
ALLY FINANCIAL PRESS RELEASE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY AFR
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BANK OF AMERICA PRESS RELEASE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY CAPITAL ONE
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STATEMENT SUBMITTED BY CFA
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STATEMENT SUBMITTED BY CHIME
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CITI PRESS RELEASE
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LETTER SUBMITTED BY CONSUMER REPORTS
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LETTER SUBMITTED BY CUNA
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LETTER SUBMITTED BY DOUBLECHECK
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LETTER SUBMITTED BY GUSTO
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STATEMENT SUBMITTED BY ICBA
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STATEMENT SUBMITTED BY NCLC
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STATEMENT SUBMITTED BY ABA
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