Why Banks Are Eliminating Overdraft Fees

The average overdraft fee costs consumers $35 per infraction, which makes it an inconvenient and frustrating part of day-to-day banking for many people. But some major banks — Capital One, Bank of America, Truist, U.S. Bank and Wells Fargo — have made recent moves to reduce or eliminate overdraft fees for their customers. In 2019, Discover also moved to remove fees on all of its bank accounts, including overdraft fees, and Ally Bank removed overdraft fees in 2021.

According to research from the Consumer Financial Protection Bureau, banks collectively earned more than $15 billion in overdraft fees in 2019, which means that individual banks could potentially miss out on hundreds of millions of dollars if they stop charging overdraft fees. For example, Capital One’s move to remove overdraft fees will cost the company $150 million, according to a spokesperson.

So what’s in it for the banks that are getting rid of these fees?

Why are banks removing or reducing overdraft fees?

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

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

“What we’ve found is that when we make these kinds of changes, our customers notice and prospective customers notice, too,” says a Capital One spokesperson. “We have come to realize that these policies, while expensive in the short term, pay off in the long run.”

Some financial institutions, such as Chime and SoFi, have gone as far as to offer consumers a certain amount of money — similar to a line of credit — that they can tap if they overdraw their accounts. These features are provided for 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 system for overdrafts

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 per day if a customer keeps using their debit card without sufficient funds in their account, which could add up to hundreds of dollars. There can also be additional related fees for having an ongoing negative balance, using an overdraft protection transfer service or using an overdraft line of credit. Ultimately, consumers can be responsible for substantial overdraft-related fees, making financial hardship even more difficult.

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

When banks enforce overdraft fees, they have a way of punishing people who are likely already facing some financial difficulty. The coronavirus pandemic has highlighted this hardship as people have had to adjust to new ways of working and making ends meet. Therefore, the trend of banks removing or reducing overdraft fees can be seen as a step forward for consumers who need help improving their financial standing.

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

The move to remove overdraft fees is good for consumers. Nevertheless, overdraft fees might be a relatively low source of revenue for a bank. For example, Capital One reported a 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 is about 4.8% of its total net revenue for that quarter. Compared to revenue for the whole year, that percentage will dramatically drop.

How consumers can evaluate and avoid overdraft fees

Consumers dealing with harsh overdraft policies at their current bank can look into banking products that don’t have overdraft fees or give customers the option to turn it off, meaning a transaction will be declined if the account has insufficient funds. Consumers can also look for banks that alert customers when their account balance is getting low.

Since excessive overdraft fees can get in the way of building wealth, Phillips sees the trend of banks removing them as a positive and inclusive move for more consumers to establish and maintain their financial security.

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

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