JP Morgan (NYSE: JPM) Predicts New Overdraft Legislation and Policy Changes Will Cut Profits by $500 Million Annually

The U.S. Senate’s banking committee published new draft legislation which would severely limit banks’ ability to charge large overdraft fees, in a move that would be beneficial to consumers but would diminish industry profits. One bank, J.P. Morgan Chase (NYSE: JPM), has already stated that they stand to lose up to $500 million each year in revenue from the legislation.

The new legislation sponsored by Senate banking committee, Chris Dodd, states that fees would have to be proportional to the cost of processing an overdraft. There would also be a maximum number of overdraft fees of one per month and six per year according to the plan. Institutions would also be prevented from “manipulating the order in which they post transactions” and “require customers be notified . . . by e-mail, text, or traditional mail” when they overdraw their accounts. The legislation would also require banks to tell customers at a cash machine or in a branch if a transaction would cause an overdraft to occur.

During the last several years, overdraft fees have transitioned from being a niche area of revenue to a major source of income for the banking industry.

Chuck Schumer (D-NY), a cosponsor of the legislation, stated “The bottom line is, debit cardholders are getting scammed by their banks,” Schumer continued, “This crackdown on overdraft policies is overdue.” In the U.S. House, Carolyn Maloney (D-NY) has introduced similar legislation.

It’s not a surprise that banks aren’t terribly excited about Congress cutting into their narrow profit margins with the legislation. Jamie Dimon, J.P. Morgan Chase’s CEO, stated that new consumer protection rules and new overdraft fees could cost them up to $500 million a year in revenue.

Although Wells Fargo, Bank of America, Chase and other banks have pledged to make their overdraft policies more friendly, this new congressional legislation would likely effectively brign an end to overdraft fees being a significant source of revenue for banks.

Moeb Services, an economic research company, estimates that banks make about $36.7 billion annually from overdraft fees. The research group also found that 44.5% of banks and credit unions made more in overdraft revenue than they did in net income, meaning that banks would have to move quickly to find new revenue streams if their ability to charge overdraft fees was severely hindered.