Since 2010, consumers who walked into any bank to open a checking account got the choice of whether to opt in to overdraft coverage on debit card purchases.
But despite that standard opt-in requirement, there remains wide variation in how different banks design, sell, and price their overdraft plans. Overdraft fees at banks range from as little as $7.50 to as much as $40, according to research by Moebs Services.
The upshot is that any future overdraft rules — new rules are expected sometime after the spring release of a report from the Consumer Financial Protection Bureau — are likely to have an uneven impact across the banking industry.
Banks that have been more proactive in trying to anticipate the regulatory winds, whether by clarifying their disclosures to consumers or changing the way they order transactions, might have little to fear from the rules. But others that have been slow to adapt could be forced into making significant changes to their programs that could ultimately crimp profits.
"I'd say for the industry, it should be manageable," says Mike Turner, an analyst at Compass Point Research & Trading. "But it would have the potential to affect a few names more adversely."
TCF Financial (TCB) and Regions Financial (RF) are likely to be hit relatively hard by any new overdraft rules, according to a new Compass Point report that looked at 26 banks. A TCF spokesman was sharply critical of the report, which relied on an estimate of the bank's overdraft income as a percentage of its total earnings, while a Regions spokesman declined to comment.
East West Bancorp (EWBC), New York Community Bancorp (NYCB), and U.S. Bancorp (USB) are among the banks likely to be least affected the report found.
The banking industry is waiting for clues from the CFPB about how overdraft services might be restricted further. The first step will be a CFPB report that a spokeswoman for the consumer agency says will be published later this spring. Later on, new rules are expected.
Consumer groups are pushing the agency to require improved disclosures, to ban the reordering of transactions from high amount to low amount, and to require that overdraft fees be proportional to the bank's costs.
"We'd like to see the CFPB look at what it is actually costing banks, and see that the fees are actually reasonable," says Susan Weinstock, director of Pew's project on safe checking in the electronic age.
When the CFPB announced last year that it was launching an inquiry into overdraft programs, Bureau officials highlighted concern about a few particular issues. The CFPB said that it planned to explore whether banks were providing confusing information about overdraft fees, as well as whether consumers were receiving misleading marketing materials.
"Initial data suggests that opt-in rates differ widely among institutions," the CFPB stated in a February 2012 press release that asked whether differences in banks' explanatory and promotional materials might explain that gap.
Consumer advocates say that bank customers remain confused about overdraft fees, despite the three-year-old opt-in box.
Fifty-four percent of consumers who overdrew their accounts did not believe they opted in to coverage, compared with only 37% who believed they did, according to a 2012 survey by the Pew Center on the States.
"That shows us that there is a huge amount of confusion among consumers about how this works," says Pew's Weinstock. "These are fees that are hidden."
Some in the banking industry disagree. In a letter to the CFPB last summer, the Consumer Bankers Association said that the number of customers who opted in to overdraft services was relatively low — 16%, according a survey of some of its member institutions — suggesting that consumers are capable of evaluating their options.
The CBA has also stated that "most, if not all of the issues" surrounding overdraft fees were already addressed by regulators in the 2010 rules that included the opt-in requirement.
Still, a number of banks are listening to consumer groups' advice.
Pew has developed a model checking account disclosure form that lists "No Overdraft Service" as the default option. So far the form has been adopted by 18 banks and credit unions, including Bank of America (BAC), Capital One (COF), JPMorgan Chase (JPM), Citigroup (NYSE: C), Fifth Third Bank (FITB), SunTrust (STI), TD Bank, and Wells Fargo (WFC).
Another example of a voluntary step that makes overdraft fees more consumer-friendly: Huntington Bancshares (HBAN) gives customers a 24-hour grace period to cover overdrafts before being hit with a penalty.
Meanwhile, B of A, Citi and HSBC all have won praise from consumer groups for their policy of not allowing overdrafts on debit-card purchases, and instead merely declining transactions when the account does not have sufficient funds.
But there are significant differences between banks with respect to their marketing of overdraft coverage, says Rebecca Borne, senior policy counsel at the Center for Responsible Lending.
Without naming specific banks, she says that some companies used deceptive flyers to sell the product back in 2010 when the opt-in rules took effect.
"I think that how aggressively banks marketed it had a big impact on their opt-in rates," Borne says.
Another issue that the CFPB is probing is the reordering of transactions from high to low. That controversial practice is often costly to consumers, and the litigation it has spawned is proving costly to banks. Chase and TD Bank are among the institutions that have agreed to write big checks to settle suits.
But high-to-low reordering has not been stamped out, according to consumer groups. Some banks now reorder certain types of transactions, such as check and online bill payments, but not debit card purchases or ATM withdrawals. That likely generates less revenue than reordering all transactions, but it still produces a meaningful amount of money, with use of online bill pay on the rise.
Of the 26 banks studied by Compass Point, eight either reorder ATM withdrawals and debit card transactions or reserve the right to do so, the report found.
"A lot of banks still post high-to-low," says the Center for Responsible Lending's Borne. "It does continue to be a big problem."
The recent Compass Point analysis looked at 26 banks' public disclosures in an effort to better understand how any new overdraft rules might affect their bottom lines.
Few banks disclose how much income they earn from overdraft charges, which means any industry-wide analysis will be imperfect. But banks do disclose their income from service fees, a category that includes overdraft charges.
Compass Point looked at banks that disclose their overdraft fee income and found that it amounts to 47% of their service fee income, on average. Then the firm applied that percentage to estimate overdraft fee income at other banks.
The results show wide variation in overdraft fee income as a percentage of earnings per share. That ratio was 16 times higher at TCF than it was at New York Community Bank or East West Bank.
Other companies that appear to have a relatively heavy reliance on overdraft fees include Synovus Financial (SNV) and First Horizon Financial (FHN), according to the report. A Synovus spokesman declined comment Friday. First Horizon did not immediately return a call seeking comment.
Jason Korstange, a spokesman for Wayzata, Minn.-based TCF, took issue with the report's findings, saying that it relies on conjectures.
Korstange also noted that Compass Point has a sell rating on TCF. "So it doesn't surprise me," he said.