In theory, overdraft fees charged by banks are meant to be a “convenience” for customers so that their purchases are not declined when they are unknowingly low on funds. In practice, however, these fees have become a major revenue generator for banks that charge an average of $33.58 for each overdraft. That means consumers can be hit with multiple fees if they accidentally make numerous purchases while past the limits of their account. Studies show that this practice particularly harms financially vulnerable and minority populations while banks earn more than $15 billion annually on overdraft fees.
Along with being highly unpopular among regular account holders, overdraft fees are also receiving more attention from the Consumer Financial Protection Bureau (CFPB). At the end of 2021, the federal agency announced that it would start scrutinizing institutions that are “heavily dependent on overdraft fees.” As a result, many banks are now reconsidering their overdraft policies. Citigroup, for instance, recently announced that it will eliminate overdraft fees later this year, with the company aiming “to make the financial system easier and more equitable for communities who have little or no financial buffer.” Lenders like Capital One and Ally financial announced similar plans in a potential effort to avoid the wrath of the CFPB.
“They might see the writing on the wall,” said industry analyst Ken Tumin. “They are being proactive on overdraft fees and coming out with new policies.” Other lenders are reducing their overdraft fees but not eliminating them entirely, such as Bank of America which will lower its charges from $35 to $10. What’s more, Capital One’s overdraft protection program is only available to customers who maintain steady deposits, a requirement that might undermine efforts to protect the financially vulnerable. Other banks may start to offer a grace period where customers are given a few days to offset their negative balance before they are penalized. “It’s not outright elimination, but it is more customer-friendly,” said Tumin.
Questions:
- Why are some banks revising their policies on overdraft fees?
- Do you think banks should reduce overdraft fees or eliminate them entirely? Why?
Source: Alicia Adamczyk, “Banks Like Capital One and Ally Are Eliminating Overdraft Fees,” CNBC, December 3, 2021; Lananh Nguyen, “Citigroup to Get Rid of Overdraft Fees, the Biggest Bank to Do So,” The New York Times, February 24, 2022.