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Business News/ News / Cap on Overdraft Fees Poised to Dent Revenue at Canadian Banks
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Cap on Overdraft Fees Poised to Dent Revenue at Canadian Banks

A proposal included in Canada’s federal budget this week promises to rein in the fees banks charge customers for overdrawing their accounts — a move that would provide relief for low-income clients while hurting lenders’ revenue, though perhaps not significantly.

Cap on Overdraft Fees Poised to Dent Revenue at Canadian BanksPremium
Cap on Overdraft Fees Poised to Dent Revenue at Canadian Banks

(Bloomberg) -- A proposal included in Canada’s federal budget this week promises to rein in the fees banks charge customers for overdrawing their accounts — a move that would provide relief for low-income clients while hurting lenders’ revenue, though perhaps not significantly.

It’s tricky to measure the exact impact of the government’s planned cap of C$10 ($7) for fees on non-sufficient funds, but overall service fees represent about 2.5% of total revenue for most lenders, Gabriel Dechaine, an equity analyst with National Bank of Canada, said in a report to clients.

The big banks currently charge a penalty of C$35 to C$50 when customers’ accounts don’t have enough money to cover a check or pre-authorized debit payment. But lenders’ fee income also includes a broader range of charges to both business and personal customers, Dechaine noted, adding that banks already offer some protections against overdraft charges. 

“An educated guess would put ‘at risk’ NSF fees at 1% (or less) of total bank revenues," Dechaine said in the report, co-written by associates Pranoy Kurian and Jacob Gardiner. 

Similar US rules proposed in January could cost the biggest banks as much as $3.5 billion in overdraft revenue per year, according to the Consumer Financial Protection Bureau, which put forth the regulation in conjunction with the White House.

Read More: US Proposes Rule to Crack Down on High Overdraft Fees

Canada’s crackdown on overdraft penalties is part of a broader push by Prime Minister Justin Trudeau’s government to tackle so-called junk fees. It’s also targeting hidden charges in online marketing for items such as airline and concert tickets. 

The planned cap on overdraft charges provides “welcome relief for the most vulnerable Canadians," anti-poverty group Acorn Canada said in a statement. “This fee is predatory and hurts the poor the most." 

The Canadian Bankers Association is reviewing the government’s budget “in detail to assess its implications," Maggie Cheung, a spokesperson for the group, said by email. 

The budget also promises to expand access to free or low-fee bank accounts. The government directed the Financial Consumer Agency of Canada to negotiate with banks to secure voluntary agreements to offer better service, including allowances for more monthly transactions, for such accounts. 

Capital Gains

Apart from direct measures aimed at banks, the National Bank analysts said the government’s planned hike on capital-gains taxes could hurt the financial sector. 

The government said it will tax Canadian companies on two-thirds of their capital gains, up from half currently, with the change set to apply to individual taxpayers with gains of more than C$250,000 in a year.

“This move could hamper capital investment in the country, which would limit Canada’s economic growth potential," the analysts said. “And, as we all know, bank stocks are a proxy for a country’s economy."

Read More: Trudeau’s Ex-Finance Minister Criticizes Capital Gains Tax Hike

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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Published: 19 Apr 2024, 12:35 AM IST
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