Banks with a Specialty You Want to Avoid
A business model driven by overdraft fees
If you were shopping for a new bank and one was named First National Bank of Overdraft Fees — or its digital cousin, Overdrafts-R-Us.com — you’d probably keep shopping.
The nonprofit Brookings Institute has identified a short list of banks with more prosaic names, but whose profits are heavily dependent on collecting overdraft fees.
The Brookings analysis notes that the average regional bank generates 9% of its profit from overdraft fees, but it identified six regional banks that derive more than 50% of their profit from overdraft fees.
—First Convenience Bank
—Woodforest National Bank
—Armed Forces Bank
—Gate City Bank
Overdraft fees are insanely important to the first three banks on that list. Their overdraft revenue accounts for more than 100% of their profit, effectively offsetting losses in other parts of their business.
There’s no telling, however, if these banks are the most dependent overdraft-chargers. As the Brookings article points out, small banks (assets less than $1 billion) aren’t required to report their overdraft fee revenue.
An overdraft, of course, is essentially a short-term loan from your bank. And banks have observed the rich interest charges that payday lenders levy on short-term loans. So, it’s little surprise that some banks seem to specialize in overdrafts.
If your household cash flow is hard to predict, and you could use an overdraft mulligan every once in a while, online-only banks may be your best bet.
A recent report from management consulting firm Oliver Wyman, notes that most digital-only banks use no-overdraft-fees as a marketing hook. Don’t worry, online banks are just as safe as brick-and-mortar.
A quick web search of “best online banks” will get you to some candidates, and you can scroll on their home pages to confirm they have the FDIC-insured logo.
Credit unions and small community banks
If you prefer to stick with a brick-and-mortar place to do your banking, and you expect overdrafts are going to be a part of your financial life, the latest Moebs research suggests you shop around at credit unions or small community banks. While big banks charge an average of $34 per overdraft, Moebs says large credit unions collect about $26 on average.
If you have a hankering for small local financial institutions, community banks with less than $100 million in assets ($26 average overdraft) are an even better overdraft-deal than small credit unions (about $28 on average).
Check the processing order
Before you sign up with any new bank or credit union, confirm that it doesn’t tilt the overdraft odds against you. You want to find the fee schedule fine print and look for an explanation of the “processing order” policy.
Chances are your bank might receive a bunch of different transactions on your checking account on a given day, often without a specific time stamp. For example, maybe there’s an ATM withdrawal, a few debit-card purchases, and maybe an automatic bill payment.
In those situations, a bank needs to decide the order in which to process all the transactions. What you want to see is that the bank or credit union uses a “low to high” ordering system, which means it processes the smallest debit first, and then the next smallest, etc.
Alas, some banks use a “high to low” processing order. That is the very definition of consumer unfriendly, as it ups the odds that a low balance account will trigger overdrafts because the biggest debit is processed first. And then each subsequent item triggers an overdraft fee.
Moebs Services, a financial data research firm, estimates that through the third quarter of last year, consumers had been hit with about $30 billion in overdraft charges.
Cash-flow coaching and monitoring apps
Obviously, avoiding overdrafts is the best practice. Easier said than done? Understood.
But if your issue is that there are just a few slip-ups a year when you lose sight of cash flow, a budgeting app might be your ticket out of the overdraft cycle.
A web search of “best budgeting apps” will get you to some good candidates to research. Some are free. Others charge a monthly or annual fee. Paying up can be more than worth it, as the annual costs are typically less than three overdraft charges at a big bank.
Moreover, the budgeting apps are all about giving you real-time feedback on where you’re at, and most importantly, they offer tips and advice on how to get on top of your cash flow so you can steer clear of costly speed bumps like overdraft charges.