The 25 largest US banks by number of branches have made substantial changes to their overdraft policies in the past 12 months, which could save consumers more than $4 billion a year. These reforms at the biggest banks are expected to have outsized benefits for black and Hispanic customers, as they are more likely to incur overdraft fees.
The banks are taking the action 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 are also facing increased competition from neobanks, digital-only financial service providers that offer many of the same services to consumers as traditional banks, although they don’t charge overdraft fees. Federal guidelines in 2020 that gave banks regulatory clarity on offering small loans also allowed them to provide liquidity to distressed customers without an overdraft. Additionally, the reduction in consumer reliance on overdrafts during the pandemic has highlighted what a banking system less focused on overdraft revenue could look like.
Most of these top 25 banks have lowered overdraft penalty fees, reduced the daily maximum number of overdraft fees charged, added a grace period or buffer amount before fees are charged, or eliminated fund fees (NSF) or overdraft transfer fees. Some passed these milestones in 2021, while five did so in quick succession in January. Other banks have since followed suit.
The overdraft has generated significant income for the banks
Banks initially created overdraft programs to help consumers cover small incidental fees that arose before an account holder’s next deposit, as paper checks could be slow to clear, but the fees had become a focus of major profit for many deposit taking institutions.
Most overdrafts today are for 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 be made in exchange for paying overdraft penalties. Additionally, about 3 in 4 overdrafts said they were unaware of their right to have their transactions declined free of charge if the account did not have sufficient funds to cover a debit purchase.
The CFPB estimates that consumers paid $15.5 billion in overdraft and insufficient funds fees in 2019 alone. Overdraft penalties and NSF fees have averaged $35 per transaction in recent years, with repeated overdrafts causing some consumers to become unbanked, meaning they are no longer served by a bank . High or unpredictable fees were a top reason given for not having a bank account in a 2019 survey of unbanked households by the Federal Deposit Insurance Corp.
Repeatedly high overdraft fees can harm the financial well-being of struggling consumers as well as the inclusiveness of the banking system if customers are forced to leave or close their accounts. In January 2022, the CFPB asked for the public’s opinion on junk fees, i.e. inflated or hidden fees. In a letter to the office in April, Pew pointed out that NSF’s overdraft and fee markets have not shown signs of price competitiveness and fees have not aligned with provider costs. For consumers, these costs have therefore historically proven to be unnecessarily high.
Several changes reduce overdraft fees
Among the top 25 banks, more than half said they would no longer charge NSF fees on personal checking accounts, and a similar number said they would charge no more than three overdraft fees per day. A majority will no longer charge fees to transfer money from other linked consumer accounts to cover overdrawn transactions. Previously, these transfers had a median price of $10.
Some banks are also now giving customers an extra day before charging a fee and allowing negative balance buffers – they don’t charge a fee when accounts are only slightly overdrawn. That’s helpful, because nearly two-thirds of overdrafts said in a 2013 Pew survey that the transaction that caused their most recent overdraft was $50 or less. In addition, seven of the 12 largest banks announced or launched small installment loans or lines of credit. These products allow customers to borrow small amounts of money from their bank on affordable terms, rather than paying penalties or turning to high-cost non-bank lenders.
Annual consumer savings
Recent changes to bank overdraft programs are expected to save consumers more than $4 billion a year. Changes to the three major banks alone are expected to save consumers more than $2 billion each year in fees. CFPB research found that these three banks accounted for 44% of all overdraft revenue 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 due to high and unpredictable fees, and small loans from banks will provide an affordable option for those who have used payday loans or similar loans before. Repeated account withdrawals by payday lenders have also been linked to the loss of checking accounts.
Many of the country’s major banks have taken strong steps to reform overdrafts. Going forward, it will be important to see if smaller banks and credit unions follow suit and adopt equally beneficial changes.
Alex Horowitz is a Principal Officer and Linlin Liang is a Senior Associate of The Pew Charitable Trusts Consumer Lending Project.