He hoped to get the bank to waive the fee, but even his in-person appeal at a local branch was denied. Since he and his wife were living paycheck to paycheck, the $35 would make it much harder to pay their full rent or electric bill and avoid penalties on those bills too, he said, recounting the incident that occurred a few years ago. At the time he was working as a trainer at PetSmart, and his wife was unable to work due to disabilities. “I told the lady I had dealt with flat out that I could go to the parking lot, pick up the pennies people leave on the ground, and I could, within a couple hours, have the 54 cents,” he said. Steele ended up leaving Bank of America (which didn’t respond to a request for comment) and pays check-cashing fees because he doesn’t have a bank account anymore. His wife pays $5 a month just to have an account at a different bank, and for most of his life he’s felt penalized for not having much money. “It wears on you because you’re being punished by a system that’s set up to make people like myself and my wife fail,” he said. “It’s expensive to be poor.” By definition, overdraft fees—also known as non-sufficient funds fees or bounced check fees—are more often than not paid by people who have low bank balances and are, therefore, the most vulnerable financially. In essence, they serve as recurring short-term loans, but advocates for consumers like Steele point to the hefty and very disproportionate cost as one of the most classic examples of banks taking advantage of people to make profits. Regulators and lawmakers have turned up the heat after the pandemic economy laid bare and exacerbated the disparity in people’s financial fortunes. Major banks like Capital One and Chase have announced plans to eliminate or redesign overdraft fee programs, and policymakers are proposing more sweeping reforms to not only eliminate abuses but rethink the goal altogether. “Of course, the easiest way to eliminate overdraft fees would be to eliminate overdrafts,” Michael Hsu, the acting head of the Office of the Comptroller of the Currency (OCC), said at a financial services conference this week. But, “for those living paycheck to paycheck, the flexibility offered by low- to no-cost overdrafts can empower them to pay their bills on time, avoid high-cost alternatives, and improve their credit profile.”
$15.5 Billion in Fee Revenue
Overdraft fees work in different ways, but they are typically charged when a customer who is enrolled in a bank’s overdraft protection program spends more than their available balance. The transaction goes through and the recipient gets their money, but then the customer is charged a flat fee, often around $30. In 2019, banks in the U.S. collected an estimated $15.5 billion in overdraft fees, according to the latest data from the Consumer Financial Protection Bureau (CFPB.) For their part, banks say most people don’t mind paying a fee to avoid a bounced check. “Surveys show a strong majority of consumers appreciate and value overdraft protection, and many are choosing banking products that provide overdraft coverage,” Rob Nichols, president of the American Bankers Association, said in a recent statement. But banks could consider several reforms to better support people’s financial health, not the least of which is allowing negative balances without charging a fee—or essentially eliminating them, the OCC’s Hsu said at the conference, held virtually by the Consumer Federation of America. Other possible reforms include adding a grace period before charging a fee, warning consumers of potential problems using balance-related alerts, and eliminating multiple fees for overdrawing multiple times in the same day, he said.
Chase, Capital One, and Ally Back Away
Ally Bank eliminated the fees altogether in June, and Capital One recently said it would do the same, giving customers individualized overdraft limits—free of charge—based on their deposit history and other factors. Chase didn’t go as far as either of those banks, but said this week it would start adding a one-day “catch-up” period for customers to get their balance back up to no more than $50 overdrawn (a cushion it expanded from $5 earlier this year) before the fee was charged. The bank will also start giving customers access to their direct-deposited paychecks two days early. “Many banks have been walking away from overdraft recently, in part because there’s been a light shone on the practice,” said Aaron Klein, a senior fellow at the Brookings Institution think tank who has researched overdraft protection fees. “Some banks more than others lean on overdrafts to make more profit.” Indeed, the CFPB announced last week that it would be more closely scrutinizing banks that rely heavily on overdraft fees for revenue, though it didn’t specifically say how.
A Boat Named Overdraft
Klein’s research of select smaller banks showed some have even had overdraft revenue exceeding their total net income. “Sadly, bank regulators continue to permit this, and as we know, addicts rarely quit on their own without an intervention,” Klein said. The CEO of one overdraft-heavy bank even named his boat the “Overdraft,” according to CFPB prosecutors who filed a lawsuit against Minnesota-based TCF National Bank in 2017, accusing it of designing its application process to obscure the fees. (The bank settled in 2018, agreeing to pay $25 million in restitution to customers.) Research has painted a clear picture of who is mainly paying overdraft fees—people like Steele who are living on small financial margins. The bulk of the fees, however, are paid by a small group of frequent overdrafters, the CFPB said in a 2017 study. Just 9% of bank accounts studied incurred 10 or more overdraft fees per year, but paid 79% of all fees, according to the CFPB. In Steele’s mind, overdraft fees are just one species of unfair bank charges. While not having a bank account prevents him from incurring overdraft fees, those check-cashing fees add up, and he buys debit cards when he needs to pay a bill. “These fees really only affect the lower-income people and families,” Steele said. “It totally destroys and hurts us.” Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.
