Why banks are eliminating overdraft fees

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Average overdraft fee It costs consumers $35 per violation, making it an inconvenient and frustrating part of everyday banking for many people. But some major banks (Capital One, Bank of America, Truist, US Bank and Wells Fargo) have recently taken steps to reduce or eliminate overdraft fees for their customers. In 2019, Discover also moved to eliminate fees on all of its bank accounts, including overdraft fees, and Ally Bank eliminated overdraft fees in 2021.

According to investigation by the Consumer Financial Protection BureauBanks collectively earned more than $15 billion in overdraft fees in 2019, meaning individual banks could lose hundreds of millions of dollars if they stop charging overdraft fees. For example, Capital One’s decision to eliminate overdraft fees will cost the company $150 million, according to a spokesperson.

So what do the banks that are getting rid of these fees stand to gain?

Why do banks eliminate or reduce overdraft fees?

“Overdraft fees are deeply unpopular with consumers, and consumers now have more options,” says Leigh Phillips, CEO of fintech nonprofit SaverLife and chair of the Consumer Advisory Board of the US Financial Protection Bureau. Consumer. “They used to only have mainstream options like banks and credit unions or ancillary services like payday loans. Now neobanks and challenger banks are creating services that are well suited to a variety of consumers.”

With the rise of these new smaller banks, in addition to the first online and mobile banking services, the banking industry has had to find more ways to compete for new customers. Overdrafts can be stressful and costly, and if a bank can help customers avoid these potentially significant fees, that bank could be more attractive to consumers.

“What we’ve found is that when we make these kinds of changes, our customers notice and potential customers notice,” says a Capital One spokesperson. “We’ve found that these policies, while costly in the short term They pay off in the long run.”

Some financial institutions, such as Chime and SoFi, have gone so far as to offer consumers a certain amount of money, similar to a line of credit, that they can use if they overdraw their accounts. These features are provided free with qualifying account activity. For example, Chime’s SpotMe feature can give customers up to $200 to cover the cost of a transaction instead of overdrafts, and SoFi offers customers up to $50.

The current overdraft system

Overdraft fees often involve more than just the one-time fee for overdrawing an account. Sometimes, a bank will charge an overdraft fee multiple times a day if a customer continues to use their debit card without sufficient funds in their account, which could add up to hundreds of dollars. There may also be additional fees associated with having a continuing negative balance, using an overdraft protection transfer service, or using an overdraft line of credit. Ultimately, consumers may be responsible for substantial overdraft-related fees, making financial hardship even more difficult.

“Some consumers have a bad pattern of overdrafting, often because they made a mistake or didn’t get paid what they expected,” says Phillips. “When they do get paid back, a lot of it is being taken to pay overdraft fees. It’s not sustainable, especially for people who are on the lower socioeconomic spectrum or who don’t have consistent income, like people who work in the job. economy or having hourly jobs.

When banks impose overdraft fees, they have a way of punishing people who are probably already facing some financial hardship. The coronavirus pandemic has highlighted this difficulty, as people have had to adapt to new ways of working and making ends meet. Therefore, the trend of banks to eliminate or reduce overdraft fees can be seen as a step forward for consumers who need help to improve their financial situation.

“By making changes to our overdraft and non-sufficient funds fee policies, we’re giving customers the opportunity to better manage their cash flow, correct course when needed, and support their growth and financial well-being,” says a Capital One spokesperson. .

The move to eliminate overdraft fees is good for consumers. However, overdraft fees can be a relatively low source of revenue for a bank. For example, Capital One reported net income of $3.1 billion in the third quarter of 2021 alone. The $150 million the company says it will lose from overdraft fees represents about 4.8% of its total net income for that quarter. Compared to full-year earnings, that percentage will drop dramatically.

How consumers can evaluate and avoid overdraft fees

Consumers facing strict overdraft policies at their current bank can search banking products They don’t have overdraft fees or give customers the option to turn it off, which means a transaction will be declined if the account doesn’t have enough funds. Consumers can also look for banks that alert customers when their account balance is getting low.

Since excessive overdraft fees can hinder wealth creation, Phillips sees the trend by banks to eliminate them as a positive and inclusive move for more consumers to establish and maintain financial security.

“We’re at a time where people need to participate in the financial mainstream with equal access,” Phillips says.

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Chanelle Bessette writes for NerdWallet. Email: [email protected]

The article Why Banks Are Eliminating Overdraft Fees originally appeared on NerdWallet.

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