Junk, NSF, and Representment Fees

Author: Rachel Mondragon, Director of Financial Institution Compliance

In December 2021, Capital One Bank announced it would no longer charge overdraft fees. One month later, Bank of America announced it would be eliminating NSF fees and reducing overdraft fees. This trend has continued with some of the nation’s largest banks (i.e. Citibank, Fifth Third) following suit. But why the sudden turn around and what’s the problem with charging overdraft fees? In this article, we’ll take a closer look at the current environment surrounding junk fees, NSF, and representment fees.

Banks, like other for-profit entities, are in the business of making money. Afterall, the goal is to make a profit at the end of the banking day, like any other business. But according to the Consumer Financial Protection Bureau (CFPB), NSF revenues reached an estimated $15.47 billion in 2019.  In addition, the Federal Deposit Insurance Company (FDIC) reported that by the third quarter of 2021, its insured banks collected a staggering $69.5 billion in NSF fees.

To understand the context, we’ll examine the terminology in more detail.

• Junk Fee – Fees charged by banks (and others) to feed the business’ bottom line, despite the consumer not receiving anything in return.
• NSF Fee – Also referred to as “Non-Sufficient Funds, or Insufficient Funds Fee”, charged by a bank when a transaction is returned to the merchant or is left unpaid after determining there were not enough funds to cover the transaction.
• Overdraft Fee – Charged when the bank does not return the transaction, but pays it instead, despite the account no having enough funds.
• Representment Fee – When a merchant tries to debit an account for a transaction, and it is returned unpaid by the bank (NSF), afterwards the merchant attempts to “represent” the same transaction for payment. Each time the merchant tries to collect for this same transaction and there are not enough funds to cover it, the bank charges the consumer a representment fee.
• APSN – Abbreviation for “Authorized Positive Settled Negative”. The scenario in which one transaction was authorized by the consumer at which time their account had enough funds to cover the debit; however, by the time the merchant settled the transaction there were no longer enough funds due to other interposing debits settling sooner.

At first glance you may be thinking that APSN scenarios are rare. Let’s consider an example:

Suzy has an available balance of $200 at 8:00am on Monday, according to her bank.  She goes to her favorite coffee bar and authorizes a $12 transaction.  Later, Suzy authorizes $18 for lunch.  By the time Suzy gets home that evening she has forgotten all about her two expenditures that day.  She also didn’t realize that the $200 credit card payment she made last Wednesday finally settled. This leaves Suzy with an available balance of – $30, and since her account was negative at the time of settlement, she was charged two $35 overdraft fees one for the coffee, and another for the lunch bringing her available balance to – $100.

Should Suzy have known that the $200 pre-authorized debit (credit card payment) would take several days to settle? And was it her fault the two transactions on Monday settled much faster?  Afterall, when she checked her available balance on Monday morning, it showed enough to cover the two smaller purchases.  Scenarios like this example depict what the CFPB refers to as “unanticipated or surprise overdraft fees”.

Referencing the October 2022 CFPB Circular 2022-06, “[O]verdraft fees assessed by financial institutions on transactions that a consumer would not reasonably anticipate are likely unfair. These unanticipated overdraft fees are likely to impose substantial injury on consumers that they cannot reasonably avoid and that is not outweighed by countervailing benefits to consumers or competition.”

Conclusion:

The simple practice of charging NSF or overdraft fees is not considered unfair, but the associated disclosures, or lack thereof should be considered as well.  For example, why charge more than one representment fee for the same item? Or why charge a representment fee at all if your institution is not incurring extra fees or providing an additional service?  Is this practice worth it if it means you lose business to the competition that is eliminating these same fees?

If your institution hasn’t done this already, it should review its business justification for overdraft and related fees, including policies, procedures, and disclosures, in addition to weighing the regulatory, legal, and reputational risks.