Gate City Bank is part of what report calls overdraft fee ‘giants’, but bank says picture is skewed
Aaron Klein, senior economic studies researcher for the Brookings Institution, wrote that “a few small banks have become overdraft giants” and cited Gate City Bank as one of six banks with deposits of $ 1 billion or more. who have earned at least half of their income net of overdraft fees.
Gate City Bank, headquartered in Fargo, drew 59% of its net income from overdraft fees in 2020, according to analysis from the Brookings Institution, a research and advocacy group.
In an opinion piece on his findings, Klein said there has been an “explosion” in overdraft fees that “makes basic banking expensive for people living paycheck to paycheck. “.
Kevin Hanson, president and CEO of Gate City Bank, said the bank’s focus on consumer banking – and its lack of business loans, farm loans, and trust services offered by many other banks – skew the numbers, as much of its business comes from running checking and savings accounts.
“We’re going to have a large amount (of overdraft fees) because we’re a retail-focused bank,” Hanson said. Gate City Bank, with 43 branches in North Dakota and Minnesota, has about 30% of the checking account market in North Dakota, which Hanson says is the largest share of all banks.
The fees that Gate City Bank customers most wanted to be forgiven, Hanson said, were ATM fees – the fees that Gate City does not charge its own customers and reimburses when they withdraw money at counters. automatic from other banks.
Since 2006, Gate City Bank has reimbursed more than $ 43 million to its customers for ATM fees they incurred at other banks’ ATMs, Hanson said.
Many banks charge ATM fees, which Brookings’ analysis does not note, he said. “They’re just pulling out a number,” he said
Gate City Bank checking account customers should opt for overdraft coverage. Those who do not opt for the cover risk having their purchase refused at checkout if they do not have sufficient funds to cover the purchase, Hanson said.
Since 2015, Gate City has charged an overdraft fee of $ 32, he said. Overdraft fees for banks in the region range from $ 30 to $ 36, he said.
To avoid overdrafts, bank customers can monitor their current account balances at their convenience through online banking, SMS banking, mobile banking and phone banking, all free of charge, said Hanson.
In addition, Gate City Bank will soon offer customers with overdraft protection the ability to automatically transfer money from their savings account to their checking account to avoid overdraft fees. “Our plan is to have this available later this year,” said Hanson.
Overdraft protection is popular with customers, he said. “It is certainly more than half who opt,” he said. “It’s really the customer’s choice.
Customers who do not opt for coverage may be embarrassed to be turned down. He gave the example of a motorist trying to refuel in cold weather; an overdraft charge is probably better, he said, than running out of gas in cold weather.
Last year, Gate City Bank generated interest income which accounted for 55% of income, Hanson said, compared to 13.4% for service fees, including overdraft fees, with mortgages contributing to 18 , 2%.
With deposits of $ 2.58 billion, Gate City Bank’s overdraft charges totaled $ 19.69 million in 2020, according to reports compiled by iBanknet.
By comparison, Bell Bank had deposits of $ 8.59 billion and overdraft fees totaling $ 2.63 million in 2020, according to reports.
While deposits are a common indicator of the size of a bank’s operations, Hanson said the mix of loans a bank makes better reflects how more or less overdraft it may be.
Almost half of Gate City’s loans – 48.6% – are mortgages, which make up just 22.7% of Bell Bank’s loan portfolio, according to bank reports. Commercial loans represent 21.3% of Bell Bank loans, compared to 4.4% for Gate City. Likewise, commercial real estate loans represent 20% of Bell Bank loans and 3% of Gate City loans.
“They’re just really different business models,” Hanson said.
Gate City Bank, in keeping with its mission as a community bank, does not focus on commercial lending or offer trust services, lines of business that do not incur overdraft fees and represent a plus. small proportion of income, said Hanson.
Because of its strong focus on checks, savings, and consumer and mortgage loans, Gate City Bank is similar to credit unions, which do not have to disclose their income from overdraft fees, Hanson said.
The average Gate City Bank checking account is almost 12 years old, indicating strong customer loyalty and satisfaction, Hanson said.
Klein of the Brookings Institution acknowledged that banks with deposits of less than $ 1 billion do not have to report their overdraft fees, so it is possible that smaller banks could be classified as “overdraft giants.”
Federal banking regulators should crack down on overdraft fees, Klein argued in his Brookings Institution report and in a commentary recently published by Politico. Some banks are moving away from overdraft fees, he wrote, while other banks have announced exemptions from overdraft fees and insufficient funds during the COVID-19 pandemic.
Gate City Bank has given all of its customers full access to their pandemic relief checks, even if they had a negative account balance, said Amy Durbin, executive vice president of Gate City. Gate City also works with its struggling customers, sometimes contacting them proactively, she said.
Many large banks have high service charges that are not reflected in overdraft fee comparisons, Durbin said.
Research conducted in 2017 by the Consumer Financial Protection Bureau found that those who overdraft their checking accounts frequently made up 9% of all accounts at the banks surveyed, but paid 79% of all overdrafts and underpayments.
Consulting firm OliverWyman released a report, “Beyond the Overdraft,” concluding that the pandemic crisis is accelerating the need to replace what it calls an “obsolete product” – overhead charges, while acknowledging that it will be. a challenge for the banks.
Competitive forces are pushing consumers away from overdraft fees, with access to digital-only banks challenging traditional banks and a growing number of banks eliminating overdraft fees.
Yet, the OliverWyman report concedes, nearly 60% of mass market checking accounts generate insufficient deposit interest income and fees to cover all costs. But it describes strategies for eliminating overdraft fees.
Among the top 25 regional banks in the country, those with deposits of at least $ 1 billion, overdraft fees generated an average of 9% of net income before taxes, OliverWyman reported. Frequent overdrafts effectively “pay off” the 60% of mass-market checking accounts that don’t generate enough interest or fee income to cover all of their costs, according to the report.