How the CFPB’s Forthcoming Overdraft Proposal Could Stifle Innovation and Competition

WASHINGTON, D.C. – In recent years, America’s leading banks have unveiled a range of new overdraft products and policies to better meet the evolving demands of the consumers they serve. These bank-led innovations have bolstered a competitive marketplace and have already ushered in billions in consumer savings. Amidst this dramatic market evolution, the Consumer Financial Protection Bureau (CFPB) is preparing to release a one-size-fits-all regulatory regime that could stifle years of bank-led innovation, hinder competition, and limit consumers’ access to highly-tailored and transparent financial tools. In so doing, the CFPB could inadvertently damage the financial resilience millions of Americans who knowingly use and rely on overdraft as one of the few emergency safety net tools still available within the well-regulated banking system.

A Deeply Valued Emergency Safety Net

Millions of Americans knowingly opt into overdraft services because of the emergency safety net and short-term liquidity it provides. For many hardworking families, this feature provides a critical financial cushion to cover unexpected expenses in times of need – whether to pay their rent or simply put food on the table.

• The vast majority (81 percent) of frequent overdraft users indicated that they would have preferred to incur a fee on their most recent overdraft transaction rather than have the purchase or payment declined.
• The overwhelming majority (92 percent) of people who overdrafted intentionally indicated that they would prefer to incur the fee rather than have the most recent transaction that prompted an overdraft declined.

The imposition of government price controls on overdraft products may hamper banks’ ability to provide this service to the consumers who have come to rely on it. This is especially relevant today given recent data indicating that 60 percent of Americans are living paycheck to paycheck.

Banks Have Made Tremendous Strides on Overdraft – Without Legislation or Regulation

Banks remain fully committed to protecting consumers’ access to overdraft even as they simultaneously implement reforms to products and policies designed to provide consumers greater transparency and choice. Some of these new features that better enable consumers to make informed financial decisions include:

• Real-time payment updates;
• Grace periods;
• Payment control, so that consumers can choose to pay or return certain individual checks, and payments when their balances are negative;
• Low-balance alerts; and
• No-fee overdraft accounts.

The video below, “The Power of Choice,” underscores banks’ commitment to providing transparency and choice to consumers:

The Impact of Bank-Led Overdraft Innovations

The result of this innovation and competition has been staggering – to the tune of $28 billion in consumer savings between 2021 and 2025.

• Overdraft changes made just in the last year by the 25 largest U.S. banks could save consumers $4 billion annually, Pew Charitable Trusts estimates, with changes at the largest three banks expected to yield $2 billion in savings alone.
• On a per capita basis, overdraft fees are projected to decline by 82 percent by year end 2023, or $167 in annual savings per U.S. consumer, Curinos estimates. If these overdraft reforms continue across the industry, consumers would save an additional $4.5B annually above the $2.5B from reforms that have been pledged or realized already.
• Aggregate fees from overdraft dropped more than $600 million last year and represent a dramatic $5.6B (36 percent) decline when compared to pre-pandemic levels in 2019.

The CFPB agrees that “changes in overdraft program settings and in other checking account policies are making meaningful difference in the amount consumers incur in various fees while using their checking accounts at their banks.” CFPB Director Rohit Chopra has even commended banks on their progress, stating that it “is one of the beauties of a competitive market. When there is real competition […] people can benefit across the board.”

A One-Size-Fits-All Overdraft Approach Would Harm Consumers

Director Chopra’s forthcoming overdraft proposal has the potential to undo the years of progress banks have made by instead forcing all banks to offer their overdraft products at certain government-imposed prices. As a result, this proposal would hinder innovation, limit competition, and potentially hamper banks’ ability to provide this essential product to millions of consumers who rely on it. If banks are no longer able to provide this service, consumers may be forced to meet their needs through payday lenders and other expensive venues outside the confines of the well-regulated banking system – depriving them of the protections they’ve come to expect from their bank.

The Bottom Line

New bank-led overdraft innovations are making a meaningful difference in the lives of the people we are all working to serve. As the CFPB considers putting this market-driven progress at risk with potential regulatory action, policymakers should recognize these reforms from the nation’s largest banks have occurred without regulatory or legislative intervention and collectively represent a transformational moment in time for the industry. Moreover, regulators must examine the cumulative effect of all of these recent and upcoming regulations (e.g., debit interchange fees, capital requirements, credit card late fees, etc.) will have on America’s leading banks’ ability to continue to serve millions of Americans each and every day.

CBA Advocacy

• To read CBA’s July 2023 letter to the Senate Banking Committee’s Financial Institutions and Consumer Protection Subcommittee reiterating opposition to the Biden Administration’s ongoing “junk fee” campaign that misrepresents well-regulated bank fees, click HERE.
• To read CBA President and CEO Lindsey Johnson’s op-ed urging policymakers to recognize the impact of recently unveiled bank-led overdraft innovations designed to expand choice, strengthen transparency, and lower costs for hardworking consumers, click HERE.
• To read CBA’s April 2022 comment letter responding to the CFPB’s RFI regarding fees charged by banks, click HERE.
• To read CBA’s March 2022 letter sent to the House Financial Services Committee’s Consumer Protection and Financial Markets Subcommittee on bank-led overdraft innovations, click HERE.