The average overdraft fee costs consumers $35 per infraction, which makes it an inconvenient and frustrating part of day-to-day banking for many people. But some major banks — Capital One, Bank of America, Truist, U.S. Bank and Wells Fargo — have made recent moves to reduce or eliminate overdraft fees for their customers. In 2019, Discover also moved to remove fees on all of its bank accounts, including overdraft fees, and Ally Bank removed overdraft fees in 2021.
According to research from the Consumer Financial Protection Bureau, banks collectively earned more than $15 billion in overdraft fees in 2019, which means that individual banks could potentially miss out on hundreds of millions of dollars if they stop charging overdraft fees. For example, Capital One’s move to remove overdraft fees will cost the company $150 million, according to a spokesperson.
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So what’s in it for the banks that are getting rid of these fees?
Why are banks removing or reducing overdraft fees?
“Overdraft fees are deeply unpopular with consumers, and consumers have more choices now,” says Leigh Phillips, CEO of nonprofit fintech SaverLife and the chair of the Consumer Advisory Board for the Consumer Financial Protection Bureau. “They used to just 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 a variety of consumers.”
With the rise of these new, smaller banks, plus online and mobile-first banking services, the banking industry has had to find more ways to compete for new customers. Overdrafts can be stressful and expensive, and if a bank can help customers avoid these potentially significant fees, that bank could be more appealing to consumers.
“What we’ve found is that when we make these kinds of changes, our customers notice and prospective customers notice, too,” says a Capital One spokesperson. “We have come to realize that these policies, while expensive in the short term, pay off in the long run.”
Some financial institutions, such as Chime and SoFi, have gone as far as to offer consumers a certain amount of money — similar to a line of credit — that they can tap if they overdraw their accounts. These features are provided for free with qualifying account activity. For example, Chime’s SpotMe feature can give customers up to $200 to cover the cost of a transaction instead of overdrafts, and SoFi offers customers up to $50.
The current system for overdrafts
Overdraft fees often involve more than just the one-time fee for overdrawing an account. Sometimes, a bank will …….