By Jonathan Thessin, Hallee Morgan, and Avery Weisel
ABA Viewpoint
The past six months have seen an extraordinary confluence of new and existing regulations impacting every aspect of banking and every customer relationship. Previous installments in this ABA Viewpoint series have covered how these changes will affect credit cards, small business lending and mortgages—all products and services that Americans “opt into” to enhance their personal and professional lives. But even humble basic banking services like the checking account are under fire from regulators at the Federal Reserve and the Consumer Financial Protection Bureau.
Proposed changes last fall by the Federal Reserve to Regulation II would immediately slash debit interchange revenue by more than a third and automatically adjust the allowable charges on transactions every two years. In January, the CFPB issued a proposal to reclassify bank overdraft services as “credit” subject to the Truth in Lending Act and Regulation Z unless the overdraft fee is equal to or less than a “breakeven” or “benchmark” fee—essentially, a government-imposed price cap. This followed the CFPB’s 1034(c) advisory opinion (issued in October 2023) prohibiting banks from charging even modest fees to cover the costs of responding to consumer information requests. Together, these changes will have far-reaching consequences on the availability of low-cost, full-service deposit accounts.
Regulatory mandates that cap fees below the cost of services and stigmatize specific offerings risk regulating away essential products and services and undermining the autonomy of consumers who appreciate the flexibility of choices. A recent survey underscores this sentiment, revealing that 88 percent of consumers value their bank’s overdraft services, with 77 percent of those who have paid an overdraft fee in the past year considering it a worthwhile expense. While overdraft services may not be suitable for everyone (and are specifically not provided by Bank On-certified accounts), it is crucial to acknowledge the importance of preserving options in banking services. The Federal Reserve and CFPB’s uncoordinated effort to impose stringent price controls without fully considering potential unintended consequences could result in price changes and product constraints that push consumers to nonbanks and other unregulated entities, thereby exposing them to increased risks.
Fee freefall: The impact of Regulation II on low-cost checking accounts
The Federal Reserve has proposed to reopen Regulation II, the rule that implements the Durbin amendment’s price controls and routing requirements on debit card payments, to sharply reduce the fees that card-issuing banks can collect to cover the costs of supporting a safe, frictionless, ubiquitous retail payments system.
The proposal would reduce debit revenue by approximately 30 percent on average transactions and put a third of regulated banks underwater in their debit programs. They would no longer be able to cover their costs—as required by law—much less offer affordable full-service checking accounts. A reduction in these fees threatens not only the competitiveness of these smaller debit card-issuing banks but, more generally, the revenue stream that banks rely on to offer low-cost deposit accounts such as Bank On accounts. The proposal also outlines an automatic process for updating the fee caps every two years (based on an unreviewable survey of covered issuer costs) without being subject to notice and comment—removing this issue from public scrutiny and transparent data on an ongoing basis.
While the Durbin amendment, as implemented by Regulation II, applies on paper only to banks with assets greater than $10 billion, the proposed reduction in interchange caps will affect revenue for banks of all sizes just as the original rules have. Data shows that the average fee for exempt single-message transactions decreased by 31 percent since 2011. As members of the Community Depository Institutions Advisory Council told the Federal Reserve Board of Governors in November 2023, “If fees continue declining . . . [banks not subject to Regulation II] will begin to curtail customer services.” And that is the critical point: while interchange is a business-to-business fee, it is the revenue stream that supports the most basic banking services, such as a checking account and a debit card.
According to the Cities for Financial Empowerment Fund, the nonprofit that designed and administers the Bank On National Account Standards, Bank On accounts were designed to be economically sustainable for both consumers and banks. Slashing debit interchange rates will upend the economics of these accounts and lead banks to reconsider their business and marketing strategies. Remarks by FDIC Chairman Martin Gruenberg point to the remarkable success of Bank On accounts (“designed to meet the needs of LMI Americans”) and describe the work of Bank On coalitions (“to increase the availability and uptake of these accounts”) as “remarkable.” Regulation II threatens to roll back this significant, collaborative progress toward fostering financial inclusion.
Overseeing overdrafts: Price control of overdraft services through Reg E, Reg Z
Under the CFPB’s proposal, banks with assets in excess of $10 billion would have to apply the Truth in Lending Act (Regulation Z) requirements to overdraft services. A covered bank would lose the ability to offset incoming credits to the customer’s account as repayment for the overdrawn amount, and, if a debit card is used, be required to conduct an ability-to-pay determination, among other requirements, if the bank’s overdraft fee is above a “breakeven” standard (defined as a price that exceeds the average of the institution’s costs and charge-off losses for providing overdraft) or at an established “benchmark fee”—essentially, a price cap—that the CFPB proposes to set between $3 and $14. If finalized, banks will likely reduce their overdraft fee to this government price cap rather than assume the compliance risks and costs associated with calculating the bank’s breakeven fee, conducting an ability-to-pay determination, or losing the ability to offset incoming credits to the customer’s account to repay the overdrawn amount. While the prospect of reduced fees may sound like a consumer win, it could well hurt those the government purports to be helping, as the government’s own research finds that “overdraft fee caps hamper, rather than foster, financial inclusion.”
Many Americans continue to need ready access to short-term liquidity. According to Bankrate survey results published in January, only 44 percent of U.S. adults say they would be able to pay an emergency expense of $1,000 or more from their savings. But if overdraft fees are capped—as the bureau has effectively proposed—banks are likely to pull back their overdraft service offerings. This would harm consumers’ access to liquidity and lead fewer of these consumers to rely on banks for deposit accounts. This reality is underscored by surveys finding that Americans value overdraft as a cashflow tool. Other analyses have shown that frequent users of overdraft rely on the service to avoid having their transaction declined. Removal of access to overdraft could mean that for important bills—like rent checks and utility payments—consumers turn to less regulated non-banks for more expensive cash-flow products or simply miss payments altogether, with potentially devastating results.
Compulsory freebies
A decade after the Dodd-Frank Act was passed, the CFPB issued an advisory opinion interpreting section 1034(c) of that law. This advisory opinion establishes a presumption that banks over $10 billion are generally prohibited from charging even modest fees to cover the costs of responding to consumer information requests. While some banks have charged fees to cover unusual expenses associated with such requests, like printing or mailing documents or conducting extensive research, it’s important to note that banks typically provide free, easy and convenient access to account information. This includes 24/7 online and mobile banking services, allowing consumers to access their account details without incurring additional costs.
The advisory opinion hurts financial inclusion by needlessly increasing the costs associated with consumer accounts, including basic checking and savings. If banks cannot charge a reasonable fee for the increased costs generated by some customers, the costs will have to be absorbed by all bank customers. This will harm the most vulnerable customers, rather than the customers currently paying these fees to cover the costs of their special requests.
Converging regulatory realities
The Federal Reserve, CFPB, and other regulatory bodies play crucial roles in overseeing the financial sector and implementing rules and regulations to ensure stability and protect consumers. However, their approach to rulemaking shows a myopic focus on the marginal costs of individual regulations without fully considering the cumulative consequences on the broader marketplace for banking services. As ABA has shared with regulatory agencies and the administration, these proposals are part of the regulatory tsunami that will force banks to reconsider how and whether to offer products that customers currently demand and enjoy.
The narrow perspective taken by regulators fails to account for the interconnected nature of regulations and their combined effects on both service providers, such as banks, and consumers, particularly LMI households. Ignoring the holistic impact will almost certainly end up stifling innovation and limiting the availability and affordability of banking services and liquidity tools, ultimately hindering the overall health and dynamism of the banking industry. Policymakers must provide a comprehensive evaluation of the cumulative impact of regulations if they truly want to create a regulatory framework that promotes a resilient and thriving financial ecosystem.
Jonathan Thessin is VP and senior counsel at ABA. Hallee Morgan is VP and senior counsel at ABA. Avery Weisel is senior director for banking and economic policy research at ABA.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
