Overdraft Fees: Which Banks Are Eliminating Them and Why
Bank of America and Wells Fargo this week became the latest financial institutions to revamp overdraft fees: Starting in May, Bank of America will reduce the penalty charged when a customer withdraws more than the amount available, from $35 to $10 .
The Charlotte, North Carolina bank said it is also waiving its “insufficient funds” fee – incurred when a payment bounces – and eliminating transfer fees associated with overdraft protection, when funds are an account are used to cover a shortage in another.
Wells Fargo said that by the end of March it would also drop its insufficient funds fee as well as the overdraft protection fee. Starting in October, the 169-year-old financial institution will also give customers a 24-hour grace period before charging overdraft fees and allow them to access direct deposit payments two days earlier.
Mary Mack, Managing Director of Wells Fargo Consumer and Small Business Banking, said in a press release that the changes “give our customers more choice and flexibility to meet their needs”.
Here’s what the two banking giants are doing, which institutions are also reducing overdraft penalties and why, and how you can avoid them in the first place.
For more, check out the best checking accounts for 2022, the best debit cards for kids, and what banking institutions are doing to help during the pandemic.
What is an overdraft fee?
Overdraft fees are a financial penalty that your bank charges you when you spend more money than you have in your account.
For example, if you have $50 in your checking account and you buy an item for $100, your bank may erase the transaction but charge you an overdraft fee because you were $50 short. It will also take the remaining $50 when you make another deposit.
Overdraft fees are a subset of âinsufficient fundsâ (NSF) fees: If your bank returns the presented payment â ââfor example, a check â without covering the amount, you are usually charged an NSF.
How much are overdraft fees?
Overdraft fees vary from bank to bank, but generally you’re looking at $30 per overdraft transaction, depending on the Federal Deposit Insurance Corporation. If an overdraft charge causes another transaction to fail, you may be hit with multiple charges at once.
And the fees are fixed whether you miss $1 or $100.
Why are overdraft fees so important?
The nation’s largest banks generated some $4 billion in overdraft fees last year, Sen. Elizabeth Warren, Democrat of Massachusetts, told a Senate Banking Committee hearing in May 2021.
According to Consumer Financial Protection Bureau.
“They’re most often charged to low-income customers, so they hit people who can least afford to be in that situation,” Varun Krishna, senior vice president and head of consumer credit for mint and Intuit Consumer Group, told CNET. “The person who ends up overdrawn on a $5 Starbucks latte can’t afford a $30 overdraft fee.”
Overdraft charges can trigger a cascading effect, throwing a person’s entire account out of balance and causing other payments to be missed. “They think maybe I need a payday advance, and that opens up a whole new set of financial problems,” Krishna said.
And the penalties keep mounting: in 2000, the average overdraft fee was $23.74, according to a Discount rate study. In 2021, they average $33.58.
Have other banks eliminated overdraft fees?
Ally Bank announced in June that it was permanently waiving all overdraft fees after temporarily scrapping them amid the COVID-19 pandemic, while PNC in April rolled out a feature for its online customers that helps prevent discovered.
In December, Capital One announced that it would eliminate all overdraft and insufficient funds fees in 2022 for its consumer banking customers. (The company already offers free overdraft protection.)
The National Consumer Law Center called the decision a “historic moment” that will have “considerable benefits for the most vulnerable consumers”.
That same month, JP Morgan Chase also eliminated its return item fee/insufficient funds fee and increased its overdraft âcushionâ from $5 to $50.
“The overdraft service fee only begins with transactions that result in an overdraft of more than $50 at the end of the business day,” the company said in a statement.
Later this year, Chase will begin giving customers 24 hours to update their balance to avoid fees and will allow customers to use their directly deposited pay up to two business days early.
âThese changes have already provided additional support to more than two million customers who have avoided an average of $60 in wait charges before their paycheck hits or are a little low on funds that day,â said Jennifer Roberts, CEO of Consumer Banking at Chase. â, said in the press release.
Jennifer Bombardier, Director of Consumer Public Affairs at City, told CNET that the money Citibank collects on overdraft fees “is among the lowest compared to our peers.”
According to Bombardier, Citibank refuses ATM or point-of-sale debit transactions when cash is not available and processes checks from lowest to highest amount, minimizing the impact of an overdraft.
Krishna said he suspected there were talks of reducing overdraft fees in many banks.
âA lot of customers move between the big banks, so they try to follow their offer,â he said. “But if you want to innovate, you have to think a few steps forward – I think we could see even more change coming.”
Be sure to check with your bank for any changes to their overdraft fee policies.
Why are these banks waiving fees?
Banks aren’t generally known for doing things out of the goodness of their hearts. Krishna says the trend is likely driven by a variety of motives, including good public relations and a desire to avoid government intervention. (In 2021, the House and Senate proposed bills to limit overdraft fees.)
There are also new products and institutions in the banking world with which they must compete.
âOverdraft fees should have been improved a long time ago,â Krisnha said. “The reason they didn’t is that they were able to take advantage of the misfortune. But they have to get rid of these predatory practices. You have new players who don’t charge these fees. But it’s It’s like a drug – – it’s hard for them.”
How can I avoid overdraft fees if my bank charges them?
In addition to transferring your money to one of the banks that have eliminated overdraft fees, you can always turn them off: According to the CFPB, if you do not agree to the overdraft fee, transactions that exceed your available balance will simply be declined.
It’s not a foolproof option, though: if you write a check that bounces and is returned by the merchant, your bank or credit union will likely hit you with an insufficient funds charge again.
There are other strategies to make an overdraft less likely, such as signing up for low balance alerts. Mint offers an overdraft early warning system independent of your banking system, Krishna said.
You can also link your checking account to your savings account â so funds can switch between them if needed â or link your checking account to a line of credit. You may still have to pay fees and interest, but that’s usually less than an overdraft, according to the CFPB.