Bounced check charges proving profitable for U.S. banking industry: NSF fees are boon for bottom line, bane for customers

San Diego Business Journal, June 25, 2007 by Candice Reed

Banks say they are doing their best to discourage customers from bouncing checks--even going so far as to charge $30 and up.

None of the banks surveyed for this article could confirm how much it profits from NSF, or non-sufficient funds, fees.

The Consumer Federation of America recently reported that U.S. consumers paid $33 billion in bank fees in 2003.

Annually, that amounts to 3 percent of non-interest income for a bank, according to Celent Communications, a Boston financial services research firm.

Industrywide, Celent said NSF-related fees can total up to 50 percent of a bank's revenues from consumer checking accounts.

"There are a lot of labor costs involved in covering an NSF check," said Chris Crockett, group manager at San Diego National Bank. "With our level of service, we have human intervention of a bounced check, which means we often call clients and ask them to make a deposit. It's a service to our customers that we feel they appreciate."

Crockett said 15 percent of his customers will have funds pulled from their checking or overdraft protection accounts when a check bounces.

But he said his bank charges $23 for NSF checks, which is on the low side for bounced check fees. He said he knows of other banking institutions that charge $50 and more for the service.

"There are some customers that just forget to deposit a check and others who push the limits," he said. "No one has more control over your checking account than you do."

Competition Intensifies

He said San Diego National may raise its NSF fees in September due to the increasing competition.

"Credit unions and Internet banking are making this business highly competitive," he said. "It's been a very interesting 12 months in regards to profits for banks, to say the least."

Competitive or not, NSF fees, along with automated teller machine, or ATM, stop payment and miscellaneous bank fees, are helping banks generate income of $55 billion this year, according to Celent Communications.

"It's not all profit," said Gail Benton, a representative for Celent. "And banks are losing money because it's often cheaper to cash a paycheck at a local convenience store or even Wal-Mart. People who are most at risk of bouncing a check often find other ways to keep their money out of banks."

Since the start of deregulation in the 1980s, the number of banks has dropped 50 percent, said Benton.

Gary Lewis Evans, president and chief executive officer of Bank of Internet USA in San Diego, said his bank charges $25 for an NSF check, but that most customers are encouraged to apply for a credit line to avoid overdraft fees.

"Because we are an Internet bank, we have one office, which means we don't have a lot of overhead," Evans said. "We have customers in all 50 states and we have over $832 million in assets. We're making a profit by not having all the brick and mortar."

Protection Available

Evans predicts that banks will begin to change the way they charge fees because of the intense competition, especially in San Diego.

"We're making money, but I'm not sure everyone else is," he said. "It used to be that we were a cash society, but we've evolved. More and more people are using check cards, credit cards and the Internet ... and banks will have to change with the times."

Gary Cady, CEO and president of Torrey Pines Bank in San Diego, said his institution discourages customers who habitually bounce checks by charging $30 per overdraft.

"We try to encourage customers not to bounce checks and so we try to cross-sell other services such as overdraft protection," Cady said. "But of course overdraft (protection) requires good credit and many people who bounce checks don't have that type of credit."

While banks said that they need to charge fees for bounced checks and other services because of the intense competition, Cady said Torrey Pines counts on positive customer service to keep customers happy.

"If they incur NSF fees we cross-sell other products to help them keep their accounts straight," he said, adding, "because if we don't make them happy we don't make a profit."

Candice Reed is a freelance writer based in Vista.