Garnet Capital Advisors Blog

April 30, 2015

Tech-savvy consumers cost banks money

The overdraft fee - from a consumer perspective, these words are dreaded. From the financial institution's perspective, however, the overdraft fee income has been an important part of free checking accounts.

Many banks rely on overdraft fees - as well as other related fees, like ATM fees - as a way to generate  income. According to a Consumer Financial Protection Bureau report, overdraft and non-sufficient funds fees comprise roughly 75 percent of all consumers' checking-account fees. Overall, these fees average more than $250 per year per person.

Naturally, this adds up for the financial institutions, which is why the declining trend in banking fees has some noticing how consumers bank has changed.

Bank fees on the way down
Recent reports from a number of financial institutions have shown that earnings are on the way down, according to American Banker. The key finding is that lower service charges on deposit accounts are being reported.

Overall, banks have never depended more on fees in order to widen margins and generate income. American Banker noted that financial institutions have to rely heavily on these fees, in part due to the lack of cost-saving options at the moment. While the pure cost of fees remain the same, the number of fined consumers is dwindling.

And for banks, this is a trend worth paying attention to.

Technology at the heart of fee decline
One of the main reasons for the drop in fee income for banks is the tech-savvy consumer. More people are aware of their account balances - which decreases the odds of an overdraft - while even more use technology to better manage their money, grow their savings and spend less than predicted.

Cheaper gas prices have also helped, William Cooper, TCF Financial chairman and chief executive, told American Banker.

"[L]ower oil prices have gone into deposits, not spending," he explained to American Banker. "On average, the customer has a little bit more money in their account, and they haven't cranked up the spending as was anticipated."

From a technology perspective, tools like online and mobile banking mean consumers are more plugged into their accounts, less prone to "accidents" and more informed about smart banking strategies. The end result is fewer overdrafts, a drop in fees and reduced income for banks.

This is another example of technology benefiting the consumer, while banks continue to look for viable options to bolster income and dodge the ever-shrinking profit margin.