The 25 largest US banks by number of branches have made substantial changes to their overdraft policies in the last 12 months that could save consumers more than $4 billion a year. These reforms at the largest banks should have big benefits for African-American and Hispanic customers because they are more likely to incur overdraft fees.
Banks are taking these steps amid much-needed scrutiny from federal financial regulators, including the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau (CFPB), as well as Congress. U.S. banks also face increased competition from neobanks, digital-only financial service providers that offer many of the same consumer services as traditional banks, though they don’t charge overdraft fees. federal guidance in 2020, which gave banks regulatory clarity on offering small loans, also allowed them to provide struggling customers with liquidity without overdraft. Additionally, the reduced reliance of consumers on overdrafts during the pandemic highlighted what a banking system less focused on overdraft revenue could look like.
Most of these 25 big banks have lowered the overdraft penalty, lowered the maximum daily amount of overdraft fees charged, added a grace period or reserve amount before fees are charged, or eliminated fees. non-sufficient funds (NSF) or overdraft transfer fees. Some took these steps in 2021, while five did so in quick succession in January. Since then, more banks have followed suit.
The overdraft has generated significant income for banks
Banks originally created overdraft programs to help consumers cover small incidental charges that occurred before the account holder’s next deposit because paper checks could take time to clear, but fees had become a major profit center for many depository institutions.
Today, most overdrafts occur from debit card transactions and electronic payments. More than half of overdrafts surveyed by Pew in 2013 did not recall agreeing in advance for debit card transactions to take place in exchange for paying overdraft penalties. Additionally, about 3 in 4 overdrafters said they were unaware of their right to have transactions declined without a fee if the account did not have enough funds to cover a debit purchase.
The CFPB estimates that consumers paid $15.5 billion in overdraft and non-sufficient funds fees in 2019 alone. Overdraft penalties and NSF fees had averaged $35 per transaction in recent years, and repeated overdrafts caused some consumers to become unbanked, meaning they no longer receive services from a bank. High or unpredictable fees were a top reason cited for not having a bank account in a 2019 survey of unbanked households by the Federal Deposit Insurance Corp.
High and repeated overdraft fees can harm the financial well-being of struggling consumers, as well as the banking system’s inclusion if customers are forced to abandon or close their accounts. In January 2022, the CFPB solicited public input on junk rates, that is, inflated or hidden charges. In a letter to the office in April, Pew noted that the NSF fee and overdraft markets have shown no signs of price competitiveness and fees have not aligned with provider costs. For consumers, then, these costs have historically been unnecessarily high.
Several changes reduce overdraft costs
Among the top 25 banks, more than half have said they will no longer charge insufficient funds fees on personal checking accounts, and a similar number have announced they will charge no more than three overdraft fees per day. Most will also not charge fees for transferring money from consumers’ other linked accounts to cover overdraft transactions. Previously, these transfers had an average price of $10.
Some banks now also give customers an extra day before charging a fee and allow negative balance reservations; they do not charge fees when accounts are slightly overdrawn. That’s helpful since nearly two-thirds of overdrafters reported in a 2013 Pew survey that the transaction that caused their most recent overdraft was for $50 or less. Additionally, seven of the top 12 banks have announced or launched small installment loans or lines of credit. These products allow customers to borrow small amounts of money from their banks on affordable terms, instead of paying penalties or turning to high-cost non-bank lenders.
Annual Consumer Savings
Recent changes to bank overdraft programs are likely to save consumers more than $4 billion annually. Changes at the three major banks are expected to save consumers more than $2 billion each year in fees. CFPB Research found that those three banks accounted for 44% of all overdraft receipts in 2019, excluding credit unions and smaller banks.
These consumer-friendly changes should also help reduce the number of unbanked Americans over time. Fewer consumers will be forced out of the banking system by high and unpredictable fees, and small loans from banks will offer an affordable option for those who once used payday or similar loans. Repeated withdrawals from accounts by payday lenders have also been associated with loss of checking accounts.
Many of the nation’s big banks have taken strong steps in overdraft reform. Going forward, it will be important to see if smaller banks and credit unions follow suit and enact similarly beneficial changes.
Alex Horowitz is a Principal Officer and Linlin Liang is a Senior Associate with The Pew Charitable Trusts Consumer Finance Project.