On a pound-for-pound basis, Bank of America's (NYSE:BAC) overdraft policy is surprisingly one of the best for consumers among big banks.
The big business of overdraft fees
Starting in the first quarter of this year, banks must report to the FDIC how much money they earn from overdraft fees. On an absolute basis, the numbers are disturbing, to say the least.
In the first three months of this year, JPMorgan Chase, the nation's biggest bank by assets, charged its customers a whopping $415 million for overdrawing their accounts. Bank of America and Wells Fargo followed not far behind, reporting first-quarter overdraft fees of $371 million and $355 million, respectively.
Viewed through this lens, you'd be excused for concluding that Bank of America's overdraft policy is, in fact, one of the worst. It does, after all, generate more noninterest income from this source than any other bank in the country, with the exception of JPMorgan Chase.
However, if you adjust for the fact that Bank of America has more consumer deposits than any other U.S. bank, then you can see that, on a pound-for-pound basis, it is actually one of America's most consumer friendly depository institutions from the perspective of overdraft fees.
On an annualized basis, Bank of America's quarterly revenue from overdraft fees equates to only 0.24% of its total consumer deposits. By contrast, regional banks such as Regions Financial, Huntington Bancshares, and U.S. Bank, have overdraft-fee-to-consumer-deposit ratios of two to three times higher, at 0.72%, 0.48%, and 0.43%, respectively.
Among the nation's largest lenders, in other words, Bank of America generates less in overdraft fees from each dollar of consumer deposits than does every other big bank but for Capital One -- which is first and foremost a credit card lender -- and Citibank, which has largely eschewed a consumer-deposit franchise in favor of multinational commercial and investment banking businesses.
Bank of America's past problems with overdraft fees
For some of you, this may come as a surprise given Bank of America's history. At the beginning of 2011, the North Carolina-based lender settled a class action lawsuit over its overdraft policies for $410 million. The bank had been sued after it was caught reordering its customers' debit card transactions in a way that maximized fees.
Say, for instance, that you had five transactions on a particular day -- four of which occurred in the morning and were for $5 each, while the fifth occurred in the afternoon and was for $200. If your balance at the start of the day was $195 dollars, then logic seems to dictate that you would incur one overdraft fee -- for the final $200 charge -- as the first four transactions all took place while your balance was positive.
Under Bank of America's former overdraft policy, however, that's not how it worked. At the end of each day, the bank would reorder your transactions based on size, with the biggest processed first. Thus, in this case, as opposed to incurring one overdraft charge, you'd have incurred five.
Just to be clear, Bank of America wasn't the only financial institution doing this. It was, I'm sad to say, an industry-wide practice. Fortunately government regulators have reined in these practices over the last few years, and, while banks still appear to be reordering transactions, their customers must now voluntarily opt-in to so-called overdraft protection. Because not all customers do so, banks now get less noninterest income from overdraft fees than they used to.
In short, Bank of America leaves a lot to be desired when it comes to the treatment of its customers even today, but, at least on this account, it seems headed in the right direction.