TCF Financial Corp. says it will become the first large bank in the nation to stop charging fees of $35 or more every time customers overdraw their checking accounts, a move that analysts predict could mark the beginning of the end of overdraft fees.
Before the end of the year, TCF customers will no longer have to pay a penalty for each time they write a check or use their debit card when they lack the funds in their account. Instead, they will be charged a single fee of $10 to $25 if their accounts end the day with a negative balance. The fee will based on the amount that was overdrawn.
The move counters one of the banking industry's most despised, yet profitable, practices. People who lack the means to maintain higher balances should benefit the most. Critics say lower-income customers are routinely victimized because they are forced to pay multiple, $35 overdraft fees on small transactions such as cups of coffee, transit passes or groceries before they find out later that their accounts had temporarily dipped below zero.
"What you'll have less of is the guy who writes ... 10 [overdrafts] in a given day and ends up paying $350 in fees," said Bill Cooper, TCF chairman and CEO. "There will be fewer of those kinds of train wrecks."
Despite criticism from consumer groups and regulators, banks have been reluctant to make significant changes to their overdraft policies, in large part because of the amount of money at stake. Overdraft charges remain the single largest source of service-charge income for banks -- a projected $38.5 billion in 2011, according to one economic research firm.
However, TCF is gambling that its new overdraft policy will attract thousands of frustrated customers from rivals -- irate over having to pay hundreds of dollars in overdrafts a year. The thinking is, the business brought by these new customers will more than offset any reductions in fee income.
"It's a bold step," said Greg McBride, a senior financial analyst with Bankrate.com in North Palm Beach, Fla. "If it works, they certainly won't be standing on an island. Banks often move like a school of fish, particularly when something works."
In a conference call Thursday with analysts, Cooper said the bank will give customers the option of receiving text messages and e-mails if their accounts go negative or fall below certain levels, to prevent surprises.
TCF's move comes as Congress and federal bank regulators look to rein in banking industry fees. Last year, the Federal Reserve imposed new rules that prohibit banks from automatically assessing overdraft charges when people spend more than they have in their accounts. Under new regulations, banks can still charge the fees, but only when customers sign up, or "opt in," for overdraft protection.
Consumer groups had hoped the new opt-in rule would finally address the problem of people being charged multiple overdrafts for small transactions -- occasionally referred to as the "$35 cup of coffee." However, to the surprise of many industry watchers, the affect was muted. Tens of millions of Americans still voluntarily signed up for overdraft protection, in large part because many still view it as an important backstop when their accounts run dry.
However, the size of the fees and the manner in which they are processed remain hugely unpopular. "To charge someone $35 for a single overdraft is simply too much," said Michael Moebs, economist and founder of the firm that bears his name.
Many banks, including TCF, Wells Fargo and U.S. Bancorp, have been accused in lawsuits of manipulating the sequence of customers' transactions to generate more overdraft income. Many large banks process larger checks and debit-card payments before smaller ones. This reordering, known as "high to low" check clearing, often results in customer accounts being depleted faster than if they were debited from accounts in their actual order.
For TCF, the decision on overdraft fees isn't the first time it has dramatically challenged traditional banking practices.
In 1986, TCF turned the industry upside-down when it introduced "totally free checking" accounts. At the time, it was not unusual for banks to charge $20 a month for a checking account. Although the term free checking was a bit of a misnomer (the bank still charges for checks and overdrafts), the new product brought a flood of depositors to the bank. Other banks soon offered free checking accounts to compete.
However, large banks, including TCF, have largely moved away with free checking over the past year and introduced monthly fees on accounts that previously had none, to offset lost income from new limits on fees.
Peyton Green, a bank analyst at Sterne, Agee & Leach in Nashville, Tenn., said TCF has "very little to lose," by overhauling its overdraft policies. The bank reported Thursday that its first-quarter income from fees and service charges plunged 19 percent from a year earlier, due to new regulatory limits on fees and reduced account activity. The bank's revenue has declined 3 percent over the past year to $288.3 million from $297.3 million a year earlier.
"The status quo has not been much fun for TCF," Green said. "It's worth a shot."
TCF's stock is languishing. Shares have fallen 19 percent since May of last year.
TCF's gamble could be the banking equivalent of Southwest Airline's "bags fly free" campaign, Green said. Southwest has won market share from its rivals in part because of the popularity surrounding its policy of not charging customers for checked bags.
"In TCF's case," Green said, "it would clearly differentiate them in a market where everyone else is taking the same approach."
Chris Serres • 612-673-4308