A refresher on banks ending overdraft, NSF fees

Let's talk about overdraft fees.

Citigroup just announced that it had removed overdraft, overdraft protection transfer and returned item fees from its Citi Retail Banking consumer accounts, among other changes. It is the largest U.S. bank to make such dramatic changes to its policies. 

But many other banks are reducing or eliminating overdraft and nonsufficient funds (NSF) fees. While some of this is likely tied to the Consumer Financial Protection Bureau's heightened interest in the charges, and an expectation that the agency will draft rules governing "junk fees," more banks seem to be following the lead of early adopters to stay competitive.

There have been several recent disclosures from midsize banks, many of which are based in the Southeast. 

A number of those banks have quantified the financial impact, or they have provided enough info to help analysts make estimates. They include Cullen/Frost Bankers, Zions Bancorp., Trustmark, Hancock Whitney and Ameris Bancorp. 

This chart shows the estimated financial impact for each bank.

Sources: Company reports, KBW and Janney Montgomery Scott

New York Community Bancorp in Westbury and Flagstar Bancorp in Troy, Mich., which are in the process of merging, recently said they would eliminate NSF fees and cut back on other overdraft fees. 

First Financial in Cincinnati said it will eliminate NSF fees when an item is returned unpaid and notification fees when an account remains overdrawn. Other fees will be reduced.

South State in Winter Haven, Fla., will get rid of NSF fees and transfer fees that cover overdrafts. The changes will reduce diluted annual earnings by about 8 to 10 cents a share. 

Expect to see the pace of disclosed rollbacks accelerate over the rest of this year. 

What can banks do to offset the lost revenue?

Hancock Whitney and South State have announced meaningful branch closures, which will help. Rising interest rates should also provide an offset as well. 

Other options could include identifying other revenue drivers such as Buy Now Pay Later (BNPL), digital assets services or Banking-as-a-Service (BaaS). Each of those initiatives will require significant due diligence, partnerships with third parties and a concerted effort to understand and mitigate exposures.