New Overdraft Rule Could Impact Earnings — Unless It Gets Spiked
A drastically low cap on big-bank overdraft charges — with two alternative options that may or may not matter — could eat into profits. But that's assuming the overdraft rule doesn't go the same way as the credit card late fee rule seems to be headed.
By Steve Cocheo, Senior Executive Editor at The Financial Brand
How much pain will the Consumer Financial Protection Bureau’s final rule on overdraft fees have on bigger banks? Keefe, Bruyette & Woods analysts have calculated that it will pull down earnings per share by 2.7% overall in calendar 2026, the first full year that the rule would be effective.
The securities firm considers this "relatively modest exposure," per a report issued Dec. 12, when the CFPB published its rule. However, the figure is a median. Among the 13 institutions analyzed, five institutions will be hit more severely:
- Regions Financial, down 6.1%
- Citizens Financial, 3.9%
- Wells Fargo, 3.6%
- Truist Financial, 3.1%
- Fifth Third Bancorp, 3.0%
PNC Financial Group and Huntington Bancshares both came in right on the median, at 2.7%.
The median hit to overdraft income among the large-cap banks, detailed in the table further down, is 86%.
As written, the CFPB’s controversial final rule, proposed in early 2024, applies only to institutions with more than $10 billion in assets. However, there’s concern that many more institutions — notably community banks and credit unions — will effectively be hit by the pricing restrictions in the rule. (The late date of release makes it susceptible to challenge under the Congressional Review Act.)
Why a ‘Big Bank’ Rule Could Hurt Small Institutions
The Independent Community Bankers of America, in a statement the day of release, expressed concern with "unintended consequences" on consumers and businesses resulting from "a negative ripple effect" when the rule goes into effect in October 2025. Industry analyst Mike Moebs of Moebs Services says research indicates that three out of five U.S. working-class households rely on overdraft services to meet shortfalls. The community bank group called on the incoming Trump administration and Congress to scratch the rule.
The same day a group of banking trade groups — the American Bankers Association, the Consumer Bankers Association, America’s Credit Unions, and the Mississippi Bankers Association, along with several banks — sued CFPB and Director Rohit Chopra in federal court to overturn the regulation. The parties also seek a stay on implementation of the measure until the federal district court rules on the merits of the case.
In their filing, the organizations suggested the rule would hit smaller institutions as well, a charge that was already made in comments submitted to the bureau during the proposed rule’s gestation. For its part, in materials accompanying the final rule, CFPB expressed its doubts that consumers would switch institutions due to its rule.
"To the extent that some consumers become more sensitive to overdraft fees when choosing a financial institution," the bureau commented, "the CFPB expects that small institutions will find ways to offer these consumers value that convinces them to stay."
Read more: CFPB Targets Large Digital Payment Apps, But Will It Stick?
Digging Deeper on the Revenue Impact
In its analysis Keefe, Bruyette & Woods based its estimates on the most limited pricing option permitted under the CFPB’s rule. This is $5 per overdraft. The original proposal had included a $14 cap. Among larger banks the typical charge is around $35.
While the $5 limit was the base case for KBW’s calculations — the worst-case scenario — the bureau offers two additional options in the rule.
Worst-case scenario for large-cap banks if CFPB overdraft rule is implemented
Note: The current overdraft charges are based on disclosures on institutions’ websites. Source: Keefe, Bruyette & Woods researchOne is a fee tailored to meet their costs and losses incurred in making overdraft service available. Consultant Mike Moebs indicates in a recent analysis that for most financial institutions the fee would have to be around $15 to completely cover costs and losses.
The other is to provide an interest-based overdraft line of credit — versus the common flat-fee overdraft arrangement — which would be subject to truth-in-lending disclosure requirements and fair-lending scrutiny. Moebs says his research shows that overdraft lines of credit "are unprofitable and have been extinct at 75% of banks and credit unions since the Great Recession."
Some historical perspective: Many years ago, overdraft lines of credit were made to select customers and those who did not qualify frequently saw their checks bounce. A couple of decades ago, fee-based overdraft came into vogue, which encouraged many institutions to offer free checking to many more people. A flock of consulting firms that specialized in programs designed to maximize overdraft income sprang up and a good portion of community banks began boosting fee income via overdraft.
Regarding the large-cap banks, KBW believes those institutions will continue to offer lines of credit to more-creditworthy customers and will charge fees based on costs and losses to others who overdraw.
For a variety of reasons, including greater use of technology such as phone-based balance alerts, policy changes and increased ability to tap credit cards or other deposit accounts for backup transfers, many larger banks have been seeing overdraft income fall.
An analysis of quarter three 2024 data by S&P Global Market Intelligence found that strong dependence on overdraft and other consumer deposit fees is stronger among banks under $10 billion in assets. The firm reported that all but one of the 20 banks showing the highest proportion of consumer deposit fees to operating revenue were under $10 billion.
From the archive: CFPB Targets Overdraft Programs with Reg Z Bullets
Where Overdraft Levels May be Headed
Moebs expects that implementation of the CFPB rule — if it happens — will drive all banks and credit unions to a $5 price, simply because of the competitive impact. He says that many institutions have already been reducing their fee per overdraft because of the $15 level that Walmart set for checking accounts offered with its banking as a service partners.
On the other hand, the new head of the CFPB — whether that person is a serious appointment or a caretaker pending elimination of the bureau — could pause or withdraw the rule.
Or the associations might win their case. A suit filed by a group of banking associations and other organizations recently resulted in another federal district court likely, effectively, striking down the bureau’s credit card late fee rule, after a convoluted history that saw multiple attempts to change the venue for the case. (That rule was written to apply to issuers of 1 million or more cards.)
Judge Mark Pittman of the U.S. District Court for the Northern District of Texas refused to lift his preliminary injunction on the late-fee rule’s implementation, and he said he believed that the rule did not synch with the federal CARD Act. An analysis by the Ballard Spahr law firm indicates that CFPB seems not inclined to take the case further.
