Are Overdraft Fees on the Way Out?
Momentum seems to be building for banks to eliminate overdraft fees, which can pile up on cash-strapped customers with expensive charges that add up quickly.
This summer, Citibank plans to eliminate all overdraft fees. The announcement came in February, making Citibank – ranked No. 4 in assets in the U.S., according to the Federal Reserve – the largest bank to drop the fees.
In December, two other top 10 banks, No. 1 Chase and No. 10 Capital One, announced changes to their overdraft policies that could help consumers avoid the fees.
Some smaller banks, such as online Ally Bank, already had dropped overdraft fees. But Citibank, with more than 100 million customers worldwide and about $1.7 trillion in assets, says it will stop charging customers when they overdraft their account.
Capital One also had announced the end of overdraft fees this year, and Chase said it would give customers a bit more leeway before overdraft fees are imposed.
Most banks still charge hefty fees when you overdraft, but perhaps these moves are a sign of political and competitive pressure building on banks to eliminate the fees.
An overdraft happens when you spend more funds than your checking account has in it. Your bank may allow the transaction to go through but then charge you a fee every time you overdraw your account.
An overdraft fee could be as high as $37 for each transaction, and some banks will charge that amount up to six times a day. If you fail to deposit enough funds to cover your transactions and your account stays overdrawn for several days – say, five to seven – your bank may charge an extended overdraft fee that could be $30 or more.
“Fees can add up fast, especially if you’re not getting paid for a while,” says Leslie Tayne, a Melville, New York-based attorney specializing in debt relief.
You usually have to agree – or opt in – to what banks may call overdraft coverage, giving them permission to overdraft your account and charge the fee. Otherwise, a transaction for more than you have in your account will be declined and you won’t get charged.
Banks also may offer overdraft protection, in which you link another account – for example, savings or a credit card – to your checking account, and the bank will automatically transfer funds to cover any overage. This can come with a fee that’s typically $10 to $12, though only once per day.
Some banks also will approve customers for an overdraft line of credit that will be used in the case of insufficient funds, says Charles Crawford Jr., CEO of Philadelphia-based Hyperion Bank. The customer would pay interest on that loan until it is repaid.
How Do No-Overdraft-Fee Policies Work?
No-overdraft-fee policies are different at each bank, but most of them will “decline the transaction if overdraft (coverage) is disabled,” Tayne says.
For customers not enrolled in overdraft protection, Citibank has been charging a $34 fee, up to four times a day, when an overdraft occurs. When the new policy is in place, Citibank simply will decline any transaction not covered by funds in the checking account and charge no fee. A Citibank customer enrolled in overdraft protection has been charged $10 when it’s been used, but the new policy eliminates that fee.
Capital One has been charging a $35 fee, up to four times a day, when customers overdraft their account and don’t cover the shortage by the next business day. But starting in 2022, Capital One also will decline the transactions and charge no fee. Capital One customers also may continue to carry overdraft protection, which will incur no fee.
Ally Bank may decline your transaction, but even if it lets an overdraft withdrawal go through, it won’t charge overdraft fees. Customers can sign up for transfer service, and the bank will automatically transfer funds in $100 increments from either a savings or money market account. The overdraft transfers are free, but they count toward savings transaction limits.
Discover Bank also does not charge an overdraft fee with its free checking account and will automatically transfer funds from a savings or money market account.
Chase previously had waived overdraft fees on accounts overdrawn by $50 or less and last year announced that, starting in 2022, it would let customers have a day to cover an account in negative territory before charging a fee.
Could Banks Be Feeling Pressure to Drop Overdraft Fees?
The amount of overdraft fees that consumers have paid reached an estimated $15.47 billion in 2019, according to the Consumer Financial Protection Bureau. The CFPB said in a December report that banks “continue to rely heavily on overdraft and nonsufficient funds revenue” with Chase, Wells Fargo and Bank of America amassing 44% of the total reported that year by banks with assets over $1 billion.
Sen. Elizabeth Warren, Democrat from Massachusetts, pressured the CEOs of Bank of America, Citibank, Chase and Wells Fargo on why they continued to charge overdraft fees for customers in 2020 during a May hearing held by the Senate Banking Committee.
However, banks have instituted policies that give customers “wiggle room to avoid overdrafts, much more than in years past,” says Greg McBride, chief financial analyst at Bankrate, a financial data company. In the U.S., 60% of accounts offer some type of buffer to overdraw the account between $1 and $15 without the fee being charged, McBride says.
“Even waiving the first one or two overdrafts during the year is something being done now that wasn’t in the past,” he says. “Rather than cut off the revenue stream altogether – and that’s what overdraft is, a very big revenue stream – expect more of these policies that help avoid minor overdrafts or occasional overdrafts without compromising the revenue stream from those that overdraw regularly.”
The banking industry remains extremely competitive, and one way to attract customers and deposits, “especially with the increasing prevalence of online and other banking options,” is to drop some fees, Tayne says. “A selling point such as no overdraft fees could emerge as a trend because financial institutions want to maintain and increase their market share.”
What Can You Do to Avoid Overdraft Fees?
- Check your bank’s policies if you are in a financial situation where an overdraft might occur. Consider switching to a bank that does not charge overdraft fees.
- If you’re sticking with a bank that does charge the fees, you can opt out of overdraft coverage or choose overdraft protection. Be aware that opting out may only cover the use of your debit card and that you could still face overdraft fees for autopayments or checks.
- Keep tabs on your available account balance, McBride says. “It isn’t how much is in the account, but how much is available for immediate withdrawal that counts. And if you previously opted in to overdraft protection on small-dollar ATM and debit card transactions, contact your bank and opt back out. You don’t want a $5 cup of coffee to trigger a $35 overdraft charge.”
- Consumers can also sign up for text or email alerts to monitor your balance and “adjust your spending as needed,” Tayne says. “Budget and be aware of purchases by checking spending.”