Financial institutions last year drew in the most overdraft fees since the Federal Reserve implemented a rule prohibiting banks from automatically charging overdrafts fees on ATM and debit card transactions, according to a Moebs Services Inc. research survey of 3,817 financial institutions. Much of that gain was driven by credit unions, which reported their highest-ever revenue from the charges. 

Banks and credit unions accrued overdraft fees of $33.3 billion in 2016, the most since 2009, and up from 2.5 percent from 2015. In 2010, the Federal Reserve established a rule requiring that banks allow customers to opt in to overdraft protection programs instead of automatically covering charges and slapping on an overdraft fee. U.S. fees average $30 for withdrawing or overcharging an account balance or limit, even by just a few dollars.

Overdrafts Rise When Is Economy Better

Moebs Services Inc., a Lake Forest, Illinois-based research and consulting firm for financial institutions, projects that revenue will see even bigger gains this year. The firm expects overdraft revenue fees will increase 4 percent in 2017 to $34.6 billion, with gains driven in part by a burgeoning trend in financial institutions of raising the cap on withdrawals, which now averages about $500 per withdrawal. 

A higher limit on withdrawals would generally lead to consumers in various income brackets to approach their limits, instead of just consumers in lower-income brackets, Michael Moebs, CEO of Moebs Services, told Investopedia.

An increasingly vibrant economy also drives more overdraft fees, Moebs said, as consumers in "spend mode" are more likely to trigger their over-the-limit amounts.

"When the economy gets better, the volume of overdrafts increases. When the economy gets worse, overdrafts go down," Moebs said. "It's an interesting phenomenon because you would think it would be the opposite."

Last year, JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) together charged more than $6.4 billion in overdraft and ATM fees. That’s up $300 million from 2015. JPMorgan, which raised ATM fees by 50 cents at the end of 2015, pulled in $1.97 billion, up from $1.87 billion, according to S&P Global Market Intelligence data. Wells Fargo received $1.78 billion, up from $1.63 billion. And Bank of America drew $1.65 billion, up from $1.63 billion. (See also: JPM, BoA, Wells Fargo Taking Huge Fees.)  

But even with gains from the big three banks, Moebs said credit unions are behind much of the significant revenue increases that the financial institutions are seeing in the past two years. Credit unions have slowly raised their overdraft fees to $29, nearly on par with the industry average of $30, after having taken in more customers from big banks in the wake of the 2008 financial recession. Overall revenue from overdraft fees for credit unions was $6.2 billion in 2016, an all-time high. That’s up 5.1 percent from 2015, when credit unions charged $5.9 billion, the second all-time high.

Credit unions are still opening more checking accounts as they continue to offer free checking while many banks and thrifts are easing out of providing the service.

Moebs said the current median overdraft fee of $30 is a result of fees rising much faster than inflation, and that the average "overdraft price is as far as it will go." So to incur more revenue in the future, banks will likely follow credit unions' lead of raising consumers' withdrawal limit, as some credit unions have done by allowing up to $1,500 per withdrawal for credit-worthy consumers who pose less risk. Credit unions have assumed that those credit-worthy account holders would be more likely to pay back what the financial institution provides over the limit as well as an overdraft fee. And, so far, Moebs says the credit unions have been right.

"The risk [of increasing withdrawal limits] is nowhere near what they think it is," Moebs said. "More and more banks and credit unions are starting to understand the risk, and it's not as bad as they thought."

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