Of all the fees financial institutions charge their customers, the overdraft fee is among the most hated and expensive.

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In 2021, the average overdraft fee hit a record high of $33.58 per transaction, according to the 2021 Checking and ATM Fee Study by Bankrate.com. Eighteen percent of adults with a bank or credit union account had at least one overdraft in December, according to the latest data from Morning Consult, and they tended to be younger, parents, and those experiencing income volatility.

While banks consider overdraft fees a “convenience” that ensures customer transactions won’t be declined, it’s become an important revenue stream.

Research by the Consumer Financial Protection Bureau (CFPB) reported that banks and credit unions earned $15.5 billion from overdraft and non-sufficient funds (NSF) fees in 2019.  The CFPB also found that “while small institutions with overdraft programs charged lower fees, on average, consumer outcomes were similar to those found at larger banks.”

An overdraft fee occurs when a transaction is completed even though there’s not enough money in your account to cover it. A non-sufficient-funds (NSF) fee is assessed when a financial institution rejects a transaction, such as when a check bounces. Some banks charge overdraft fees for each transaction that results in a negative account balance, and some charge a fee for each day accounts remain in the red, which means their customers might get hit with several fees per day—and for days on end—resulting in hundreds of dollars in fees.

Most of the revenue from overdraft and NSF fees is paid by households that are “financially coping and vulnerable” who struggle to save, borrow, and plan, according to the 2021 FinHealth Spend Report. About nine percent of consumers account for almost 80 percent of overdraft revenue, CFPB data shows.

Some Banks Are Finally Adopting Fairer Policies

Consumer groups have been working to eliminate or lower these fees for decades, with little success.

“Overdraft fees are an abusive form of high-cost credit that subsidizes bank accounts for wealthier people with fees on the most vulnerable,” said Lauren Saunders, associate director of the non-profit National Consumer Law Center (NCLC). “Overdraft fees are punitive and predatory and banks pitch people into overdrafting, so they can make money off the backs of poor people,” Saunders said.

Now that the issue appears to be on the front burner for federal regulators and some members of Congress, four of the country’s largest banks are changing their overdraft policies.

Capital One announced late last year that it would eliminate all its overdraft and NSF fees sometime during the first quarter of 2022. As Capital One explained in a fact sheet it sent Checkbook, customers who are enrolled in “No-Fee Overdraft” may be able to overdraw with no fee, but they have to repay the amount of that negative balance, and “any deposits made into the account” will go towards repayment.

Capital One said this service is meant to be used “occasionally when customers need money to cover expenses.” For customers not enrolled in the program or who don’t qualify, transactions that would overdraw an account will be declined and no fees will be assessed.

Two other major financial institutions announced similar policies earlier this week.

Bank of America said it will eliminate its NSF fees beginning in February. In May, the bank will reduce overdraft fees from $35 to $10, and eliminate the transfer fee for its “Balance Connect” overdraft protection that enables customers to link other accounts to their checking accounts to cover overdraws.

Wells Fargo announced an end to its NSF fees by the end of the first quarter. At that time, customers with accounts enrolled in overdraft protection will no longer be charged a fee for automatic transfers from one account to another to prevent overdrawing. Later this year, a new bank policy will give account holders a 24-hour grace period before being charged an overdraft fee.

JPMorgan Chase, the country’s biggest bank, has eliminated its NSF fee, but has been widely criticized for not dropping its overdraft fee, which is $34 per overdraw, and can be charged up to three times a day.

In response, Chase points to a series of policy changes it made last year designed to reduce the number of overdrafts. Customers now have an overdraft cushion of $50; there’s no fee if an account is overdrawn by $50 or less at the end of each business day. Chase points out that it also offers a low-cost account called “Secure Banking” that has no overdraft fees.

Later this year, Chase plans to offer two new features that should reduce overdraft fees. Customers will get a “catch-up day” to bring an overdrawn balance back to $50 or less in the red and avoid overdraft fees from the previous day. Customers who have their paychecks on direct deposit will be able to use that money up to two business days early to make payments without overdrawing.

Why not eliminate these types of fees entirely, as other institutions have done? In its news release, Chase said its customers “value access to overdraft services so that they can avoid late fees when making payments on important bills like utilities and rent, avoid negative impacts to their credit score, and can continue making everyday purchases like groceries with debit card coverage.”

“Don't let your guard down, because these changes and policies are not yet in effect,” cautions Greg McBride, chief financial analyst at Bankrate.com. “They're making the announcements now, but these don't take effect for a month, two months, as much as three or four months down the road. So, you're still going to have to do everything you can to avoid overdraft fees in the interim.”

Many Online-Only Banks Are Already There

While the big guys are getting a lot of attention, some online banks have already eliminated overdraft fees.

Chime offers an overdraft service called “SpotMe” that allows qualifying members to make a debit card transaction that exceeds their balance by up to $200 with no fee.

Ally Financial, which never charged overdraft fees on debit card transactions, put an end to all overdraft fees last year.

Discover Bank ended all fees on checking and savings accounts in 2019.

Why Is This Happening?

The financial institutions that have eliminated or restricted overdraft fees say it’s the right thing to do for their customers—to give them more choice and flexibility.

Richard Fairbank, Capital One’s chief executive, said eliminating overdraft fees brings “ingenuity, simplicity, and humanity to banking.”

Of course, there are other important reasons: unhappy customers and regulatory scrutiny.

A survey released this week by the Morning Consult found that more than a third of consumers (37 percent) who report overdrafting said they are thinking of starting a relationship with a new bank in the next six months. That’s more than double the usual rate. “Credit unions and digital banks are not immune—that pattern holds for those institutions as well,” the survey found.

Bankrate’s McBride believes competition from online banks is motivating traditional banks to reexamine their fees.

“The customers of tomorrow are the young consumers who are predominantly being hit by overdraft fees today,” he told Checkbook. And those younger customers are more inclined to bank online to avoid fees.

And then there’s potential for new regulations.

In December, the CFPB issued a news release in which CFPB Director Rohit Chopra put the nation’s financial institutions on notice that his agency would be “enhancing its enforcement and scrutiny” of banks that are heavily dependent on overdraft fees.

“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” Chopra said. “We will be taking action to restore meaningful competition to this market.”

The Consumer Federation of America (CFA) has encouraged the CFPB to do more.

“Although the CFPB plans for cracking down on illegal overdraft practices through supervision and enforcement are welcome, the CFPB should enact a rule requiring all banks and credit unions to end this destructive practice that does far more to hurt consumers than to help,” said Rachel Gittleman, CFA’s Financial Services Outreach Manager.

The NCLC says it would like to see the CFPB write rules to fix what it calls “a broken market.” Regulation is needed, NCLC’s Saunders told Checkbook, to “make it safe to bank no matter where you bank.”

On Thursday, trade groups representing the nation’s banks and credit unions sent a letter to the CFPB expressing concern that the government’s reports on overdraft fees “lack important facts about overdraft services—namely, information about the consumers who use and value the product.”

The groups, including the American Bankers Association and the Credit Union National Association, urged the bureau to conduct a study to determine what consumers want, with a focus on the small group of customers who overdraft regularly.

“Any policy action that may impair access to overdraft services should not be based on selective anecdotes or unsupported assumptions about consumer behavior but by seeking to understand the regular user of overdraft protection,” the letter said.

Should Congress Do Something?

Some members of Congress are also interested in reining in overdraft fees. Sen. Elizabeth Warren (D-Mass), who’s on the Senate Committee on Banking, has been a leading critic of these fees. “Bank overdraft fees snatch billions from struggling families & even during this pandemic, big banks raked in billions from this abusive practice,” she tweeted in December.

Rep. Carolyn Maloney (D- NY), a senior member of the U.S. House Committee on Financial Services, wants to “crack down on predatory overdraft fees. Her Overdraft Protection Act would:

  • Require that fees be “reasonable and proportional” to the cost of processing these transactions and the amount of the overdraft.
  • Prevent institutions from re-ordering transactions to artificially increase their fees.
  • Limit the number of fees that can be charged to one per month and six per year.
  • Empower consumers by requiring that they proactively opt-in to overdraft programs in the first place—rather than automatically being enrolled.
  • Improve transparency and disclosures.
  • Prohibits charging overdraft fees for “debit holds” that exceed actual transaction amounts.

“I’ve sounded the alarm for years on harmful overdraft practices, and I’m glad that financial institutions are starting to make changes in response to my demands. But we’re not done yet—all consumers should be protected, which is why I’ve reintroduced my Overdraft Protection Act this Congress to ensure commonsense consumer protections for every American,” Rep. Maloney told Checkbook. “Support for these reforms continues to grow, and I won’t stop fighting until harmful and abusive overdraft practices are ended once and for all.”

More Info

Advice from the CFPB on managing bank accounts and avoiding fees.

NerdWallet's list of tips to avoid overdraft fees.

 




Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.