People hate overdraft fees. Banks abandon them or reduce them

Updated Jan. 11, 2022, 12:43 p.m. ET

Bank of America, the country’s second-largest bank, has said it is significantly reducing overdraft fees. Capital One goes one step further and completely eliminates fees. The moves come as federal regulators take a tougher stance on banks charging these often high fees.

People are hit with overdraft fees when they overspend their checking account balance and the bank manages the money for a few days.

The fees may seem unfair: you could buy a $ 2 cup of coffee and get paid a $ 35 fee. And if you don’t realize that your account is empty and you make a series of small purchases, you can quickly end up with hundreds of dollars.

“Overdraft fees are truly one of the most abusive forms of lending that banks engage in,” says Lauren Saunders of the National Consumer Law Center. She says that when it comes to regular loans, most banks don’t charge people excessively high interest rates. “But they’re doing it out of sight with an overdraft fee.”

Banks make billions on these fees

“We are the sixth largest retail bank in the United States and this will affect all of the controlling clients we have,” said Peter Boyer, senior vice president at Capital One. He says the millions of bank customers who already have what’s called overdraft protection will continue to get it, but it will be free.

“We recognize that customers have unforeseen expenses and needs at times when their cash flow doesn’t quite match between expense and income,” Boyer said. “We really want to bring our consumers to a place where they live healthy financial lives.”

Bank of America has announced that it will reduce overdraft fees from $ 35 to $ 10 starting in May. The two banks are also eliminating so-called insufficient funds, or NSF fees, charged when people overspend on a transaction that isn’t covered by overdraft protection.

All U.S. banks collectively earn about $ 15 billion a year on overdrafts and NSFs fees, according to the Federal Bureau of Financial Consumer Protection. But the CFPB says about 80% of that comes from just 9% of customers who continue to be affected over and over again with more than 10 discovered per year.

“These are people with low balances or struggling from paycheck to paycheck,” Saunders says. “So, in other words, overdraft fees fall most heavily on the most vulnerable consumers.”

By removing fees, banks will have a negative impact on their bottom line. Boyer said, “On an annual basis, Capital One will give up approximately $ 150 million.” To put that into perspective, Capital One had $ 28.5 billion in revenue last year. On the bright side for Capital One, the move could attract more clients.

Overdraft fees come under scrutiny by regulators

Capital One says free overdraft protection should go into effect within three weeks. To get it, customers will need to make regular deposits. There are limits to how much money a customer can spend too much. But there is no limit to the number of overdrafts.

Of course, paying high overdraft fees can discourage overspending. So after the fees disappear, if some customers start spending too much regularly, Capital One may change the rules.

Overdraft fees are being reconsidered throughout the industry. A smaller online bank, Ally Bank, recently dropped the fees. Some other banks have reduced them.

“This is an area of ​​interest for many banks due to the increased regulatory oversight of overdraft fees,” said Gerard Cassidy, analyst at RBC Capital Markets.

The CFPB recently signaled that it will take a close look at which banks charge these fees. Stricter regulations could therefore be on the way. And Cassidy says more banks may decide to go ahead with voluntarily ending or reducing the fees. “It wouldn’t surprise me if you saw other banks follow suit. ”

Cassidy says overdraft fees only make up about 1% of income for most major banks. “Generally speaking, it’s not a major source of income for banks,” Cassidy says.

Lauren Saunders sits on Capital One’s Unpaid Consumer Advisory Council. She says Capital One likely earns more of these fees than many other banks, as many customers live paycheck to paycheck. So, she says, if Capital One can do it, other banks can afford to do it too.

Bank of America and Capital One both provide financial support to NPR. We report on them the same way we report on all other companies.

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