Are the days of overdraft fees almost over?
Dreaded bank fees are falling even though the proportion of households paying them remains the same, new financial studies show. And banks are increasingly offering their customers alternatives such as small installment loans.
Banks charge overdraft fees to make up shortfalls when customers spend more than the amount in their checking account. (Banks can also levy “insufficient funds” fees as a penalty if they reverse a payment.) Once offered as a courtesy, overdrafts have become a lucrative source of income for banks.
But for a variety of reasons, including pressure from regulators, banks have refrained from charging the fees. According to a report by the Financial Health Network, a nonprofit organization focused on finance, banks’ overdraft and related fee revenues declined an estimated 6 percent last year to $9.9 billion compared to 2021, a year-on-year decline still “well below” the pre-pandemic level of about $15.5 billion stability.
According to Moebs Services, a financial research firm, the typical overdraft fee is $15, half what it was two years ago. (Calculation based on more than 3,600 institutions, including banks, credit unions, and financial technology companies.)
Experts say that in addition to scrutiny from financial regulators, several factors are responsible for the decline, including a consumer backlash and competition from new digital monetary instruments. The Consumer Financial Protection Bureau has scrutinized fees for financial and other services and is considering updates to overdraft rules, leading some banks to make changes.
Other measures banks are taking to reduce the burden of overdraft fees include giving customers a one-day “grace period” to make up a deficit before charging a fee. Waiver of fees for small overdrafts, e.g. B. an overspend of $5 or $10; and limiting the number of overdraft fees that can be charged in a single day.
“The changes over the last two years have been both big and positive for consumers,” said Alex Horowitz, consumer finance project manager at Pew Charitable Trusts.
While the downward trend is welcome, the proportion of households with checking accounts who reported paying overdraft fees last year remained unchanged at 17 percent from 2021, said Meghan Greene, senior director for policy and research at the Financial Health Network.
Banks still took in nearly $10 billion in overdraft fees last year, she said, mostly from “people who are struggling financially.” (The network’s estimates of bank overdraft revenue differ from the Consumer Financial Protection Bureau’s figures because the bureau’s figures reflect banks with assets in excess of $1 billion, while the network also includes data from small banks and credit unions. )
Financially vulnerable households — those struggling to pay bills on time, save for emergencies and manage debt — are much more likely to pay the fees, the network says. Almost half of these households reported paying overdraft fees in the past year, compared to just 4 percent of financially healthy households.
Also, at-risk households, which are disproportionately composed of Blacks and Latinos, are more likely to report paying more than 10 overdraft fees. Frequent overdrafts are more likely to state that the last overdraft was intentional — that is, they knew they didn’t have the funds to make the payment, but did it anyway.
“You have very few other options,” Ms. Greene said.
Such consumers are also under financial pressure from other sources, she said. Data from the network’s full FinHealth Spend report, released Friday, showed that total interest and fees on credit card balances rose more than 20 percent to an estimated $113.1 billion last year due to higher card balances and higher interest rates. Nearly half of financially vulnerable cardholders have more than $5,000 in credit card debt, Ms Greene said, meaning the higher interest rates are adding to the burden for people who are already in trouble.
The network’s annual report and overdraft notice are based on data from public banks and a January survey of more than 5,000 household financial decision-makers.
Here are some questions and answers about overdraft fees:
Which banks have eliminated overdraft fees?
Many large institutions have eliminated insufficient funds fees, and some banks no longer charge overdraft fees, including Citi, Ally Bank, Capital One and Alliant Credit Union. Other banks that have made changes include Bank of America, which last year cut overdraft fees from $35 to $10.
Some banks no longer allow their customers to spend more than they have in their account, but refuse payments in excess of the account balance. Others generally allow overdrafts, but also offer special accounts that don’t offer this service for customers who would rather avoid potential fees.
The Consumer Protection Agency tracks bank overdraft policies on its website, and financial sites like Bankrate.com also provide lists.
Does an overdraft service have advantages?
Some people may want something called “overdraft protection” to ensure important bills are paid even if the account falls below the required balance. Customers must opt for an overdraft facility for direct debit and ATM withdrawals. However, banks do not need your permission to charge overdraft fees for online payments or checks instead of cashing them.
Consumers have another option. They can link a savings account or line of credit to their checking account so funds are automatically transferred when needed, avoiding overdrafts. Some banks charge a fee when you access the substitute funds, but many have eliminated such “transfer fees” as well.
Are there low-cost alternatives for people who need short-term loans?
More and more banks are now offering their customers automated small loans. According to Pew, six of the eight largest banks (by number of branches) and seven major credit unions offer such loans. (The greater availability is partly due to guidance issued by financial regulators in 2020.)
Borrowing ranges from $5 to $1,000, depending on the bank, and can be far more affordable than relying on repeated overdrafts or borrowing from other sources like short-term loans, Pew noted. For example, borrowing $400 over three months from a short-term lender typically costs $360 in fees, while banks charge $24 or less for a loan of the same amount, Pew said.
The loans are considered safer because they are not repaid in one balloon payment, but in installments over several months. Some banks approve borrowers based on transaction history rather than creditworthiness, allowing customers with low credit ratings who may not qualify for traditional lending to benefit.
Another option: Earned Wage Access apps. The apps help workers avoid overdrafts by giving them early access to a portion of their salary to pay bills, said Todd J. Zywicki, a professor at George Mason University Law School and a research fellow at the Law and Economic Center the University. “I’m a fan,” he said.
However, some consumer advocates are advising caution as some apps may charge fees for getting the money delivered quickly, they said. Some encourage users to pay optional fees based on a percentage of the advance.