Banks traditionally make most of their money from the interest they collect on loans and investments. But a recent report found that a bank headquartered in Kansas City and its sister institution make most of their profit from overdraft fees.
Two banks owned by Kansas City-based Dickinson Financial Corporation — Academy Bank and its sister bank Armed Forces Bank — are among six banks nationwide whose overdraft fees in 2020 accounted for more than half their net income.
That’s according to a report by the Brookings Institution, a nonprofit public policy group. And while what these banks are doing is perfectly legal, economic analyst Aaron Klein said it disproportionately targets lower-income customers.
“And so I kind of asked the follow up question, which was ‘Well, if a small number of people do most of the overdrafts, are a small number of banks trying to profit off of them,” Klein said.
How overdraft fees work
Banks charge overdraft fees when customers write a check or charge a debit card and don’t have enough money in their account to cover it. The bank typically covers the overdraft and charges a fee for doing so.
But there’s not much regulation on overdraft fees – there’s no cap on how much a bank can earn from them or rules on how much they cost.
In Missouri, average overdraft fees range from $25-$30, according to Max Cook, CEO of the Missouri Bankers Association. A bank has to charge a lot of them to make a profit because sometimes the customer doesn’t pay the fee.
That’s what Academy Bank and Armed Forces Bank have been doing, according to the Brookings report. Academy Bank’s overdraft revenues were more than twice its profits (236%) in 2020 and Armed Forces Bank’s overdraft revenues were around three quarters of its profits (76%).
To put those figures in perspective, the average amount of overdraft fees as a percentage of profit for regional banks is just 9%, according to the report.
“For the vast majority of banks, overdraft is a small profit source. For Academy Bank, overdraft is the profit source,” Klein said.
A small pool of people pay the most in overdraft fees
Klein said he was inspired to research overdraft fees because prior research has showed that a small number of people are heavy overdrafters. According to a 2017 study from the Consumer Financial Protection Bureau, frequent overdrafters accounted for 9% of all accounts but paid 80% of overdraft fees.
Klein said he believes he has uncovered a business model where banks try to find heavy overdrafters. Five of the six banks mentioned in the report have locations in Walmart stores, a low-cost retailer with a lower income customer base.
Some customers may like the flexibility that overdraft accounts provide. Cook, of the Missouri Bankers Association, said the banks are helping customers by covering charges they wouldn’t be able to pay. He said that’s not predatory behavior because customers can always go to another bank if they feel like they’re being exploited.
“There isn’t a bank in the world that will survive by trying to mess around with customers,” Cook said. “It just won’t happen because they’ll get the kind of reputation they can’t afford to have.”
Arvest Bank is another bank cited in the report, and it has dozens of locations in Missouri. Arvest marketing director Jason Kincy said customers can opt out of overdraft coverage in their accounts. He said many still prefer to opt in because they like having the bank cover a transaction that they can’t.
Kincy also said Klein left out important information in his report. He said Arvest bank’s pre-tax revenue was down 31% in 2020 because of the pandemic, meaning its overdraft fees ended up being a larger portion of revenue. And Arvest only charges $17 in overdraft fees per transaction. Since it is well below the average overdraft fee, Kincy said it shows the bank isn’t engaged in predatory lending.
The report also includes two banks headquartered in Texas, First Convenience Bank and Woodforest National Bank, and Gate City Bank, which is headquartered in North Dakota.
A double standard
It can be dangerous for banks to rely heavily on a single source of revenue.
Allen North is a vice president at the St. Louis Federal Reserve Bank. He says regulators examine banks both from a consumer compliance and safety and soundness perspective.
“On the consumer compliance side, we are probably going to spend some more time on that making sure that they are treating consumers appropriately; that’s going to be their primary focus,” North said. “Where on the safety and soundness side, we are really looking at sustainability of earnings over time.”
Consumer compliance regulators work to protect consumers, examining whether the bank is manipulating them. Safety and soundness regulators examine whether the bank’s earnings model is sustainable.
And while none of the banks in the Brookings report have been flagged by regulatory bodies, Klein said regulators would never allow a bank to rely so heavily on one source of revenue if it was something other than overdraft.
“When it comes to charging high fees to consumers who are out of money, regulators don’t seem nearly as concerned with ‘safety and soundness.’ Why is commercial real estate revenue any different than overdraft?” Klein said.
Klein said he believes there may be many more banks that rely on overdraft fees, as banks with less than $1 billion in assets are not required to report their overdraft revenue.
The St. Louis Federal Reserve Bank is the primary regulator for Arvest Bank, but it declined to comment specifically on Klein’s report. The Office of the Comptroller of Currency is the primary regulator for the other five banks in the report, and it declined to comment on the report.
Walmart didn’t respond to an interview request. Academy Bank and Armed Forces also didn’t respond to an interview request.
This story was produced through a collaboration between Missouri Business Alert and KCUR.