Banks Could Lose Billions in Overdraft Fees
America's biggest banks stand to lose billions of dollars in annual revenue if an investigation of overdraft fee policies by the U.S. Consumer Financial Protection Bureau finds that the banks' business practices are harmful to consumers.
The agency is looking into how banks like JPMorgan Chase & Co. (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C) charge their customers with overdraft fees. The Consumer Financial Protection Bureau is seeking information from the banks and their customers to find out if the banks are profiting unjustly from their overdraft procedures.
The banks are making billions of dollars each year by charging their customers a fee each time the customers make a transaction that pushes their account balance further below zero dollars. While there is nothing morally wrong with a bank charging a customer for withdrawing more money than is currently in the customer's account, the Consumer Financial Protection Bureau is looking into whether banks regularly process transactions in the order they take place or from the biggest withdrawal to smallest.
If the banks have a practice of processing the the biggest transactions first, it could be seen as a blatant attempt to boost profits by artificially increasing the number of overdraft fees that are charged to a customer.
For example, if a customer had a $100 account balance and made four $20 withdrawals, followed by a $101 withdrawal, one would expect the customer's account to be hit with one overdraft fee for the final withdrawal that caused the overdraft. However, if the bank processed the transactions at the end of the day from the biggest withdrawal to smallest, the customer would be hit with five times as many overdraft charges.
The agency is also looking into how the banks' policies affect young and low income bank customers and whether or not the banks misled their customers when informing them about changes to overdraft regulations that were put in place by the Federal Reserve in 2010.
Although the Consumer Financial Protection Bureau says that it is engaging in a fact finding mission, not an investigation into illegal activities, the banks could end up losing billions of dollars in annual fees if the investigation uncovers widespread abuses.
Traders who believe that the Consumer Financial Protection Bureau isn't going to push for changes that could cost banks billions of dollars might want to consider the following trades:
There isn't really much upside here but traders could hold onto their bank stocks if they think the investigation will go nowhere.Bearish:
Traders who believe that the banks could end up losing billions of dollars of easy money may consider alternative positions:
- If the Consumer Financial Protection Bureau announces publicly that the banks overdraft procedures are unfair, shorting banking stocks could be a profitable trade.
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