Overdraft fee cuts threaten Bank/Credit Union profitability

During the summer of 2021 alone three credit unions (Alliant, Weokie and UW Credit Union) eliminated or drastically cut overdraft fees. They are joining digital players like Chime, Ally and Capital One and in the process, potentially upsetting the profit model for many banks and credit unions.

According to industry benchmarks the average checking account accrues around $55 of “punitive” fees per year. Extracting this to a fictional bank with $2B in assets, this could put $4.0 million a year is at risk. Assuming our fictional bank has and RoA of 100bps, this potential lost revenue equates to 20% of net income.

Importantly, if this trend holds true traditional acquisition tactics like Chase’s famous $600 payment for affluent customer checking relationships will be financially compromised. From the vendor side, solutions like Velocity Solution’s Intelligent Limit System that in effect underwrites overdrafts will become irrelevant.

We are advising our clients to watch this trend closely. If NSF and Courtesy Pay fees become competitively unsustainable, traditional banks and credit unions will need to think carefully about how they will replace the lost income and sustain their RoA’s. Getting to a place where you can lose millions in revenue takes careful planning – planning that should be taking place in all banks and credit unions now. (Of course we have some ideas – give us a call!)

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