Some intended COVID-19 stimulus beneficiaries won’t see any money the federal government sends them through direct deposits because unpaid overdraft fees will more than consume newly injected funds, The New York Times reports.
The Times reports that many larger banks have pledged to temporarily “zero-out” customers’ in-the-red accounts for around 30 days so the customers can withdraw or spend the full amount of any stimulus payment. Many stimulus payments are expected to begin landing in customers’ accounts this coming week. Among the banks listed by the Times as having adopted such policies are: Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, Truist, PNC Financial Services and US Bank.
But some smaller banks and credit unions either are not offering such concessions or are dealing with requests for overdraft fee relief on a case-by-case basis, the Times reports. The paper told the stories of several individuals who are in dire financial circumstances due to the pandemic yet are at risk of not receiving any of the stimulus dollars allocated for them by the government.
The stakes for banks are substantial.
The Center for Responsible Banking, a group that among other things promotes policies favorable to financially struggling borrowers, estimates that in calendar 2019 U.S. banks collected more than $11 billion in “overdraft-related fees.”
The center’s report on the topic states, in part: “The large majority of these fees are shouldered by banks’ most vulnerable customers, often driving them out of the banking system altogether. Bank overdraft fees cause particular harm to low-income consumers and communities of color, who are already disproportionately excluded from the banking mainstream.”
The latest stimulus checks are slated to be about $600 per family member, reduced on a sliding scale as incomes rise. The $600 figure followed a protracted dispute between President Donald Trump and Congressional Democrats who wanted the payments to be $2,000 per individual and some Congressional Republicans who sought a lower figure.
After a holiday spending frenzy, consumers have returned to a more normalized rate of spending, as measured in incremental borrowing on credit cards and other forms of debt.
December saw a massive $37.1 billion increase in total credit, where revolving credit — the category that includes credit cards — surged at an annualized pace of 18.5%, after a 16.1% drop in November. The data suggests that consumers were loading up on dry tinder ahead of the year-end frenzy of gift giving and taking advantage of sales.
On Friday (March 7), new data from the Federal Reserve revealed that overall credit increased $18.1 billion during the first month of the year, above of the consensus estimate that the headline number would grow by about $15 billion.
Revolving debt was up by $9 billion. Non-revolving debt, which includes auto loans, was up by about $9 billion, as measured month on month.
Overall consumer credit increased at a seasonally adjusted annual rate of 4.3%. Despite the increase, it represents a slowdown compared to December, in which the same rate was at 8.7%.
We note that the 4.3% in January can be considered “normal” for January, as the values recorded in the same month of 2020, 20221, 2022, 2023 and 2024 were 4.4%, 3.1%, 4%, 4.5%, and 3.7% respectively.
As for the “normalization” of revolving credit, the same rate was 10.5%, 8.5% and 8.6% for 2022, 2023 and 2024 respectively. In the case of non-revolving credit, the rates for the January months of those same years were 2.1%, 3.2% and just under 2%.
During January, the total outstanding consumer credit (seasonally adjusted) reached slightly over $5 trillion dollars. Despite this, it represents a slight drop of 0.6% compared to January of last year.
The normalized pace still represents an “addition” to the overall monthly obligations that are being shouldered by already-stretched consumers. There’s also a positive read-across for BNPL providers, where a paring back on traditional avenues of credit may mean that consumers are opting instead to take on pay-later plans, tied to debit accounts.
The torrid pace of activity at the likes of Sezzle and Affirm — as many categories saw double-digit spending (and Sezzle notched triple-digit revenue growth) — has far outstripped the growth in the Fed’s data.
PYMNTS Intelligence has estimated that credit card debt has become fairly ubiquitous: Among high-income cardholders annually earning more than $100,000, 75% have an outstanding credit balance. This share is the same for middle-income cardholders annually earning between $50,000 and $100,000. A similar share — 74% — of lower-income cardholders, those annually earning less than $50,000, carry balances on their credit cards.
But the same research details that 25% of cardholders have said that their outstanding balance increased over the last year, while 55% said it stayed about the same. Just 21% said that it decreased — so the dry powder in terms of spending power is constrained a bit, especially as more debt was added in January.
Roughly 19% of our sample indicated that they had reached card limits at least once in the past year.
Elsewhere, the Fed estimated last month that credit cards continue to be the loan type with the highest share of balance 90+ days delinquent, at a percentage that reached 11.5%. This share grew 2% quarterly and 17% year over year.
According to data from the Fed, 40.2% of the total share of outstanding consumer credit is held by depository institutions. The federal government holds 30.9% of the total, while 14.8% is held by finance companies and 13% by credit unions.