What is an Overdraft Fee?
An overdraft fee is a penalty that your bank will impose whenever you spend more than what is available on your account. Certain banks offer overdraft protection that automatically transfers money from an account linked to an overdrawn account.
However, not all banks do, and some will charge fees for the service.
Overdraft charges have become a problem enough to draw the attention of Capitol Hill: Senator Elizabeth Warren was at odds over the matter with J.P. Morgan Chase’s CEO in the past year about the practice, and both chambers of Congress have introduced bills in the past to regulate the fees that can be changed several times throughout the day.
For 2020, the banks took $12.4 billion from the consumer market through overdraft charges alone in the annual spending report published by the Financial Health Network.
In response to the widespread critique — and to be competitive with online banks who have cut fees for these years, many important US institutions are either limiting or eliminating costs for overdrafts.
All banks aren’t created to be the same. As we monitor this change, Here are the seven institutions that eliminated overdraft charges and then two banks that have reduced the number of fees.
The average overdrafts fee costs consumers $35 for each infraction, which makes it an unpleasant and unsettling aspect of daily banking for many individuals. However, several central banks such as Capital One, Bank of America, Trust, US Bank, and Wells Fargo — have made recent changes to decrease or eliminate fees associated with overdrafts on their customer. In 2019, Discover could also eliminate fees from all bank accounts, including fees for overdrafts. Ally Bank removed overdraft fees in 2021.
According to the Consumer Financial Protection Bureau data, banks earned more than $15 billion in overdrafts in 2019. Each bank could miss out on thousands of dollars if they cease charging overdraft charges. For instance, Capital One’s decision to end overdraft fees could cost the company around $150 million, according to an official spokesperson.
Why are banks eliminating or reducing overdraft fees?
“Overdraft fees are deeply unpopular with consumers, and consumers have more choices now,” says Leigh Phillips, CEO of non-profit fintech SaverLife and chairman of the Consumer Advisory Board for the Consumer Financial Protection Bureau. “They used to have mainstream options like banks and credit unions or fringe services like payday loans. Now neobanks and challenger banks are creating services that are a good fit for various consumers. “
The rise of smaller, new banks and mobile and online banking banks has required new strategies to be competitive for new customers. Overdrafts can be costly and stressful. If a financial institution could help its customers avoid the costs that could be significant, the bank would be more attractive to customers.
“We’ve found that when we make these changes, our customers notice, and prospective customers notice, too,” says a Capital One spokesperson. “We have realized that these policies, while expensive in the short term, pay off in the long run. “
Certain banks, like Chime and SoFi, have gone as far as offering customers the option of a specific amount similar to an account line that they can draw in the event of overdrawing their accounts. For instance, Chime’s spot feature allows customers to receive up to $200 to cover the costs of a transaction instead of overdrafts. SoFi can provide customers with as much as $50. The features are available at no cost with qualifying account activities.
This is the current method to manage overdrafts.
Overdraft charges usually involve more than the one-time charge for the overdrawn account. Sometimes, banks will be charged an overdraft charge multiple times a day if customers continue to use their debit cards with no cash in their accounts. This could be several hundred dollars. Additionally, there could be charges for having an eternal negative balance by using an overdraft protection transfer or the overdraft credit line. Customers could be held accountable for hefty overdraft charges, making the financial burden even more challenging.
“Some consumers get into a bad pattern of overdrafting, often because they made a mistake or didn’t get paid what was expected,” Phillips states. “When they do get paid again, a lot of it is being taken to pay off overdraft fees. It’s not sustainable, especially for people in the lower socioeconomic spectrum or who don’t have consistent income, like people who work in the gig economy or have hourly jobs. “
The coronavirus outbreak has revealed the problem. Suppose banks decide to impose fees for overdrafts. In that case, they are in the business of punishing people who may be facing some financial difficulties. People are forced to adapt to new working methods and make enough money to live. Thus, the current trend of banks eliminating or reducing fees for overdrafts can be seen as a move in the right direction for people who need assistance to improve their financial standing.
“By changing our overdraft and non-sufficient funds fee policies, we are providing customers with an opportunity to manage their cash flow better, course correct when needed, and support their growth and financial well-being,” states an official from Capital One spokesperson.
The decision to end overdraft charges is beneficial for consumers. However, these fees could be a common source of income for banks. For instance, Capital One reported a net profit of $3.1 billion during the quarter of 2021’s third quarter. The $150 million that the company estimates it will lose due to fees associated with overdrafts amounts to 4.8 percent of the total net revenue for the quarter. In comparison to total revenue, the percentage of that will drastically decrease.
How can consumers evaluate and avoid overdraft fees?
People who have to deal with the excessive overdraft fees at their current bank may consider banking options that do not charge overdraft fees or allow customers to switch it off, which means that a transaction can be rejected when the account does not have enough funds. Customers can also search for banks that notify customers when there is running low.
Because excessive fees for overdrafts could hinder making money, Phillips sees the trend of banks eliminating them as a beneficial and inclusive way to allow more customers to build and keep their financial safety.
“We’re in a time where people need equal access to participate in the financial mainstream,” Phillips declares.
Nine banks that eliminated Overdraft Fees
All banks are not made the same way; therefore, seven banks have eliminated charges for overdrafts while we observe this change.
In the summer of this year, Citibank will eliminate all overdraft charges, return-item charges, and fees for overdraft protection. The company announced the announcement in February.
Citibank is a bank with around $1.7 trillion of assets. It is one of only the “big four” banks, which comprises JP Morgan Chase, Bank of America, and Wells Fargo, to eliminate overdraft fees.
Additionally, Citibank offers a Safety Check feature that allows you to transfer funds from any connected Citibank savings accounts to pay for overdrafts. This service is available for free when you have purchased a Citigold and Citi Priority account or $10 for all other charges.
Customers who have been approved for the Checking Plus account can automatically be able to transfer funds from their credit line into their checking account to pay for overdrafts.
Capital One removed overdraft charges beginning Jan. 13 and replaced the old policy with “No-Fee Overdraft” protection.
The No-Fee Overdraft Protection will permit you to draw more than your account without paying fees; however, you’ll need to transfer funds into your account to cover the overdraft amount after you’ve done it. If you attempt to withdraw money using your card after the overdrawn amount has been deposited, however, if you don’t fund your account, it will get denied.
There’s no set limit for the number of times you are allowed to overdraw, but there will be a dollar limit to the amount you can draw from your account. According to the spokesperson, this dollar amount will be determined based on the specific circumstances of your situation, as Capital One says it will constantly review “the customer’s deposit history and risk profile,” according to the spokesperson.
If you’re currently in the bank’s overdraft protection plan, likely, you were automatically enrolled in the No-Fee Overdraft security. If you’re not currently already registered, you can join anytime.
Discover is another bank that does not charge charges for overdrafts. Discover offers a free overdraft protection plan. However, you’ll need to connect either a savings or Money Market account with your debit card to be able to draw over.
While on paper Discover restricts overdrafts to 6 per calendar month for each account, Discover claims that at present, it doesn’t enforce the guidelines, so you can be able to overdraft up to six times on an occasional basis without facing the possibility of being subject to Discover closing your account.
Chime’s overdraft protection-free service is known as SpotMe. The service is not required, so you’ll need to sign up for the service if not already.
The service is available to those who deposit a direct payment of at least $200 each month to their bank account. The service claims that you can draw up to $200 per month; at first, you’ll be able to draw a maximum of $20 when you use debit cards for purchases or cash withdrawals. You could be eligible to remove the greater 200-dollar limit in the future.
If you’re eligible for this greater limit is contingent upon the details of your “Chime Account history, direct deposit frequency and amount, spending activity and other risk-based factors,” according to Chime..
Ally initially got rid of overdraft fees in the wake of COVID-19 in 2020. Ally paid back fees accrued at the time but chose to put aside overdraft charges thoroughly after the COVID-19.
At Ally, you can overdraw your account without paying fees. You’ll have up to six business days to restore your account to a positive balance. If you’ve not brought up your credit before then, Ally will work with you to find the solution as your withdrawals might be limited.
You could also sign up for an optional, no-cost overdraft transfer service. Ally can transfer funds from the linked savings and money market accounts in increments of $100. The service restricts the withdrawals to six each cycle of a statement.
The Aspiration’s “Pay What is Fair” commitment doesn’t permit you to be charged unexpected charges, such as overdraft fees. As a result, as a customer at Aspiration, You won’t be required to pay for the overdraft of your account. Still, it’s not a free overdraft service.
“We can usually prevent the processing of checks, ATM withdrawals, debit card purchases, or online transfers from happening when our members don’t have enough funds in their account to cover them,” stated Aspiration President Andrei Cherny. “If there is an accidental overdraft on an account that puts it into the negative, customers are given a period to make their accounts positive. “
In this sense, you’ll get a grace period to bring your account back to a positive state if an overdraft charge can get through.
A brand new bank is the result of the merger of Suntrust with BB&T; Trust plans to introduce two unique accounts for checking that don’t incur overdraft charges this summer as part of the brand innovative Trust One Banking. Instead of clients racking up overdraft charges, Trust One Banking will offer a negative $100 cushion to customers who deposit $100 or more over two months.
If you’re an existing Trust customer, you’ll be given the option of opening the Trust One bank account for checking; however, there is no automatic transfer.
Even if you’re not signed to Trust, One Banking Trust is also planning to remove most fees associated with overdrafts for existing accounts as for items that are returned as well as negative balances on accounts and transfer fees to protect against overdrafts as per Arijit Roy, Head of Strategy, Deposits, Small Business and Analytics at Trust.
Bank of America
January saw Bank of America announce that it was cutting its overdraft fees starting in May from $35 to just $10 per transaction. In addition to reducing the expenses in May, the bank will end the price of $12 for the Balance Connect(TM) service fee to move funds between linked accounts that are overdrawn.
The same day as Bank of America, it was announced that Wells Fargo would eliminate various fees for overdrawing, beginning in March. However, they won’t disappear completely. Although you won’t be required to pay any fees if an account linked to your account is used to cover an overdraft, you’ll get a 24-hour grace period to restore your account to a positive balance if you’ve overdrawn.
Sure, as in the case of Bank of America, this move is positive; however, it feels uninspired compared to the other banks within this group.