There's nothing worse than that sinking feeling when you discover you've overdrawn your checking account. And to make matters worse, you have an overdraft fee.
An overdraft fee happens when there's not enough money in an account to cover the transaction. Most banks charge around $35 per overdraft. Depending on if you catch the overdraft in time, these fees may add up to a lot more than the initial mistake. But a change may be coming that can help.
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Banks Make Money on Overdraft Fees
Overdraft fees account for a large amount of a bank's revenue. According to research by the Consumer Financial Protection Bureau (CFPB), in 2019, overdraft fees reached an estimated $15.47 billion.
The biggest culprits for charging these overdraft fees were Bank of America, Wells Fargo and Chase J.P. Morgan. Combined, the three made up 44 percent of that national figure. This came to over $1 billion.
The large banks weren't the only ones profiting from these overdraft fees. Small institutions were also charging them.
Fees Affect Consumers
Overdraft fees affect low-income consumers the most. Eighty percent of the consumers who pay overdraft fees live paycheck to paycheck. And the fees are often more than the original transaction. In other words, a $10 purchase could have a $35 fee attached to it if you overdraw your account. A consumer who is hit several times a year can end up losing hundreds of dollars.
Consider also: How to Use a Checking Account
Federal Regulators Take Notice of Fees
The CFPB began operation in July 2011 in the wake of the 2007-2008 financial crisis. Its purpose was to protect consumers and financial institutions against irresponsible lending practices.
In theory, allowing a bank to cover an overdrawn account for a fee is lending. But, according to Laura Saunders of the National Consumer Law Center, overdraft fees are an "abusive form of lending." And although most banks don't charge exorbitant interest rates on standard loans, overdraft fees are usually outrageous.
The CFPB has taken notice of such bank practices. It has begun to scrutinize financial institutions that heavily depend on overdraft fees for their bottom line. It has also taken action against banks they found to have illegal policies.
The majority of banks have not eliminated the practice. Fees are still being charged.
For instance, the CFPB took action in 2018 when it ordered TCF National Bank to pay $25 million in restitution to customers and $5 million in penalties for illegal overdraft policies.
In 2020, the CFPB found TD Bank guilty of illegal overdraft policies. TD Bank was ordered to pay $97 million in restitution to consumers and $25 million in penalties.
Banks Respond to Federal Regulators
Banks are on alert. And many are reviewing their overdraft fee policies.
Bank of America has responded by reducing overdraft fees from $35 to $10 starting in May 2022. These new fees will lead to Bank of America's overdraft revenue being reduced by 90 percent since 2009.
Wells Fargo took another approach with its response to a regulatory threat. They are giving customers who overdraw their accounts a grace period before being charged $35. A customer will have 24 hours from the time the account is overdrawn before a fee is assessed.
Consider also: Where Can I Avoid Overdraft Fees?
Some Banks Eliminate Overdraft Fees
Some banks are taking it all the way. For instance, the largest digital bank in the U.S. eliminated overdraft fees. Ally announced in June 2021 that it was doing away with overdraft fees. All bank account holders were included without any requirements or restrictions.
In December 2021, Capital One announced it was eliminating all overdraft fees for its customers. It is the only top 10 bank in the U.S. to do this. Although eliminating fees, it will continue to provide overdraft protection at no charge.
Overdraft Fees Still Here
Fear of regulatory scrutiny is causing banks to amend their overdraft fee policies. The majority of banks have not eliminated the practice. Fees are still being charged. But some banks are lowering fees while still providing overdraft protection.
- NPR: People Hate overdraft fees. Banks are Ditching or Reducing Them
- Consumer Financial Protection Bureau: CFPB Research Shows Banks Deep Dependance on Overdraft Fees
- Capital One: 2021 Proxy Statement
- Ally: Ally Bank Elimnates All Overdraft Fees, Ending Century-Old Industry Practice and Lifting Consumer Burden
- Pew Trusts: Consumers Need Protection from Excessive Overdraft Costs
- Consumer Financial Protection Bureau: Consumer Financial Bureau Announces Settlement with TD Bank for Illegal Overdraft Practices
- Consumer Financial Protection Bureau: Bureau of Consumer Financial Protection Settles with TCF National Bank
- CNBC: Big Banks are Slashing Overdraft Fees – here’s how to avoid them altogether
- Bank of America: Bank of America Announces Sweeping Changes to Overdraft Services in 2022, Including Eliminating Non-Sufficient Funds Fees and Reducing Overdraft Fees
- CNBC: Financial Watchdog Cracks Down on Bank Overdraft Fees
- Reuters: Bank of America, Wells Fargo Scrap Some Overdraft Fees as Regulatory Scrutiny Grows
- Capital One: Capital One Eliminates Overdraft Fees for Customers