Overdraft fee horror stories are well known: A mom goes to the store to buy milk and peanut butter. She doesn’t have enough money in her account. Her bank charges an overdraft fee, making a $5 purchase suddenly cost $40.
These fees are often referred to as a “poverty tax” and a reverse Robin Hood scheme since it’s overwhelmingly low-income customers who pay them, and the charges have resulted in substantial profits for many banks and credit unions. A former bank executive even named his boat “Overdraft.”
It’s welcome news that Consumer Financial Protection Bureau Director Rohit Chopra plans to enhance scrutiny on overdraft and non-sufficient-fund fees. Already, his threat of action appears to be driving change.
Capital One just announced that it will scrap overdraft fees entirely in 2022. Chief executive Richard Fairbank said it would bring “simplicity and humanity” to banking. He’s right. Why aren’t Bank of America, Wells Fargo and JPMorgan Chase doing the same?
When the editorial board reached out to America’s biggest banks, they all responded with examples of how they have tried to lessen the burden of overdraft fees. JPMorgan Chase, for example, announced that in 2022 it will give customers a day grace period before charging the fee. But the banks made it clear the fees would remain in place on checking accounts that allow them. Bank of America’s overdraft fee is $35, Wells Fargo’s fee is $35 and Chase’s fee $34.
It wasn’t always like this. Overdrafts began as a courtesy that banks would extend to their customers at no charge. In the days when most payments were made with a check in the mail, banks recognized that, occasionally, a customer might have their rent check or electric bill payment processed before their latest paycheck was fully deposited. But in the 1990s and early 2000s, banks realized they could make a lot of money charging overdraft fees — and the regulators were not going to stop them.
Banks and credit unions made $15.5 billion off of overdraft fees in 2019, according to the CFPB. The three biggest banks accounted for more than $5 billion of that total.
As the CFPB and other regulators scrutinize these fees, there should be two key areas of focus. First, banks where overdraft fees account for more than half of their profits deserve immediate scrutiny. Many of these banks are small and midsize regional banks. Generating so much revenue from overdraft fees alone is a major risk to any bank, not to mention harmful to customers.
Second, regulators need to spell out recommended best practices in early 2022. Here’s a good place to start: Don’t charge more than one fee per overdraft, give at least a day grace period, send the customer a text or email alert, limit the number of fees per year and don’t assess fees at all if the overdraft is under $50. These are common-sense moves that will help curb the most abusive practices.
Eliminating overdrafts entirely should not be the goal. Many low-income consumers use this instead of turning to payday loans. But banks should not be making hundreds of dollars in overdraft fees off of a single low-income customer.
Ultimately, CFPB and other regulators need to make clear rules on overdraft fees. Yes, rulemaking takes time, but waiting for all banks and credit unions to do the right thing would likely take longer.
