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Over a decade since the Occupy Wall Street movement took over New York City’s financial district to protest banks’ greed and growing wealth inequality, Americans are actually paying less for their banking.
Last year, consumers spent about $305 billion in interest and fees related to financial products, down from $319 billion paid in 2020, according to the Financial Health Network’s FinHealth Spend Report 2022.
A big chunk of that comes from fees related to overdrafts. Overdraft revenues were roughly $40 billion in 2012 (after adjusting for inflation), according to economic research company Moebs Services. In 2021, banks, credit unions, community banks, and fintechs earned an estimated $33.4 billion.
The drop in overdraft fees accelerated during the COVID-19 pandemic, according to the FinHealth. And that's due, in part, to many banks shifting their policies to provide additional support to customers—particularly around fees like overdraft charges. Within the last year, more than a dozen banks announced overdraft reforms. Alliant Credit Union, Ally Bank, and Capital One all announced in 2021 they would end overdraft fees.
Starting this summer, Citibank will eliminate all its overdraft fees. Bank of America eliminated non-sufficient fund (NSF) fees in February and will lower its overdraft fees from $35 to $10 starting on May 24, 2022. Beginning in July, Huntington Bank will cut its overdraft and NSF fees from $36 to $15.
Meanwhile, Chase, Wells Fargo, Regions, Truist outlined plans to cut NSF fees and implement other limits on overdraft charges. U.S. Bank will halt NSF charges and provide a day grace period for overdraft fees.
While the scope of the changes varies from bank to bank, the reforms add up to real money—approximately $5 billion a year so far, says Aaron Klein, a senior fellow in economic studies at the Brookings Institution.
“It's great that a lot of large financial institutions are making a move away from fee-based overdraft for their customers,” says Peter Smith, a senior researcher for the left-leaning Center for Responsible Lending who’s focused on overdraft practices.
But Smith doesn’t see a few large banks changing their fees as sufficient. Especially given that nearly 18% of consumers with a bank account reported overdrafting in December, according to a survey from Morning Consult.
Not all of those consumers are banking with one of the institutions overhauling their policies, and overdraft practices are so widespread—credit unions and community banks also levy these fees. Instead, Smith and others believe that federal regulation or legislation is needed to ensure a level playing field.
If every bank and credit union made changes that reduced their overdraft revenue by about 60%, savings for consumers would exceed $17 billion, Klein testified during a recent Senate hearing. “However…that is unlikely absent regulatory or legal changes given how dependent some institutions are on overdraft for their business.”
‘We lost track of everything’
Overdraft fees can add up quickly—just ask Stacy Rodriguez, a Texas-based mother of five. Her family racked up thousands of dollars in these charges during the pandemic.
“I had everything on autopay, because I don't have the bandwidth that I used to,” Rodrigeuz tells Fortune. “Sorry that I rely on my bank sometimes.”
The 41-year-old has an autoimmune disorder and other medical issues so she’s unable to work outside the home. The family primarily relies on her husband’s income, but the Rodrigeuzes—like many American families—have faced one challenge after another over the past two years.
At the start of the pandemic, the Rodriguez family moved into her mother’s house to save the home from foreclosure. The move was costly and disruptive, and just as the family was getting settled again, both Rodriguez and her husband tested positive for COVID in September 2021. They both recovered without being hospitalized, but it was a close call for Rodriguez given her ongoing health issues.
When her husband went to visit his doctor two weeks later, the exam revealed a mass that was confirmed to be cancerous. Thankfully after surgery, her husband’s subsequent bloodwork was normal, and he was able to return to work.
It’s not surprising that managing their finances has taken a back seat. But Rodriguez was stunned when she went to do her taxes this year and realized they had racked up more than $4,000 in overdraft and non-sufficient fund fees in the family’s primary checking account with Bank of America over the past two years.
“We lost track of everything,” she says. “We got to a point for a while, because of all of our medical expenses, that my husband's check would be direct deposited on Friday morning—by noon, that money was gone, and we didn't have money until he got paid again.”
“We got to a point for a while, because of all of our medical expenses, that my husband's check would be direct deposited on Friday morning—by noon, that money was gone and we didn't have money until he got paid again.”
Like many financial institutions, Bank of America initiated an emergency pandemic fee waiver program at the start of the COVID-19 pandemic. A spokesman confirmed to Fortune that Bank of America ran this program from March through August 2020. But fees like overdrafts were only refunded if a customer was experiencing financial hardship tied to the COVID-19 pandemic and contacted the bank to specifically request the assistance.
Bank of America refunded $1,190 of the Rodriguezs' fees in 2020 and $175 in 2021. The bank declined to specify to Fortune whether this was related to the pandemic fee waiver program. But that still left the family paying nearly $2,800 in fees in 2020 and 2021—the majority of which were non-sufficient fund fees.
When Rodriguez called to get more of the fees reimbursed in January, the bank immediately refunded an additional $105, but ultimately denied her requests for additional refunds. Rodriguez subsequently filed two complaints with the Consumer Financial Protection Bureau (CFPB) over the bank’s handling of her case.
Bank of America declined to comment to Fortune specifically on Rodriguez’s situation, citing customer privacy policies. But in written response to the CFPB complaints sent to Rodriguez, the bank said it had investigated the matter and determined that no bank error occurred in the management of her accounts.
“Ultimately, it is the responsibility of each account holder to ensure that funds are available to pay for all the completed transactions,” said Bank of America in a written statement to Rodriguez, noting that requests may be denied when they’re made 60 days after an account statement is issued.
Senator Elizabeth Warren contends banks should have gone further to help customers in recent years. “During the pandemic, America’s banks got a lot of help from taxpayers. They were given special dispensation to overdraw their accounts at the Federal Reserve if they needed a little help. Now in return, the regulators asked the banks, please do the same thing for your customers,” Warren said during a May 4 Senate hearing.
She specifically called out JPMorgan Chase, Bank of America, and Wells Fargo, saying these big three banks are “collecting billions of dollars in overdraft fees from struggling families every year.” Warren estimated these banks collectively earned more than $4 billion in overdraft fees from families in 2020.
When avoiding an overdraft comes down to individual responsibility, despite all the technology and automation that banks have at their fingertips, it really raises the stakes for consumers to get this right, says Terri Friedline, a University of Michigan professor focused on financial system reform. There’s no “safety net” that's going to catch you if you make the wrong decision, she adds. Instead, consumers are on their own—and any mistakes are costly.
How the fees work
In the U.S., the vast majority of financial institutions—92.9% of banks and 60.9% of credit unions—operate overdraft programs, according to the CFPB. And the decision to levy fees or not is largely an automated process.
Typically Americans get hit with overdraft or non-sufficient funds (NSF) fees when they overdraw their checking account with a debit card purchase or recurring charge like a rent or bill payment.
When there’s not enough money in the account, banks and credit unions can temporarily cover the shortfall and charge the customer an overdraft fee, usually $30 to $35 per overdraft. This is a service that customers have to opt-in for and essentially acts as a line of short-term credit—and many consumers do take advantage of it.
Some financial institutions also offer so-called “overdraft protection” programs. With these, when a customer doesn’t have the requisite funds, the bank will draw the required money from another linked account. Usually there is a $10-$15 courtesy fee per overdraft associated with these programs, although some banks are eliminating this charge.
But while overdraft coverage and protection programs are opt-in, non-sufficient fund fees are not. When customers write checks, make direct payment, or use online bill pay services without the necessary funds in place, the bank could opt to decline advancing the money and still charge a NSF fee. NSF fees generally can’t be levied against debit card purchases. Still these charges typically cost customers $30 to $35.
“It's a punishment for not having sufficient money in one's account,” Smith says. “All of these fees are just piling on. People are occasionally using overdraft knowingly, but they don't have other choices. Their other choices are terrible—they're using payday loans or they might be borrowing from friends and family who also may not have good access to money.”
Customers who frequently overdraw not only get hit with fees, they also risk having their account closed. If that happens, the bank may flag the customer to ChexSystems, a reporting agency that financial institutions use to check customers’ banking history. These records can stay active for five years and can threaten a consumers’ ability to open a new account at a different bank.
Some banks have offered more protections around these types of fees for years, such as capping the number of overdrafts they charge per day, providing a grace period when customers can make up the shortfall before charging a fee, or even waiving overdraft fees on small purchases under $5.
Those types of programs can help many consumers. PNC offers a “low cash mode” program that gives customers a 24-hour grace period, and research found that 63% of customers who end the day with a negative balance were able to add money to cover the charges—typically within 13 hours—and avoid an overdraft fee, according to Klein’s testimony.
These fees tend to fall on those who can least afford them, the FinHealth report found. Among households with bank accounts, Black consumers were 1.8 times more likely to overdraft at least once in 2021 than similarly-situated white Americans. Latinx households were 1.4 times more likely to pay at least one overdraft fee.
“Racism is embedded into the system,” Friedline says. “All of these kind of discriminatory, oppressive policies and procedures are built into our our financial system.” And so even when banks take positive steps like reducing or eliminating overdraft fees, there are further issues that pop up in other areas of the banking system that continue to drive inequities.
What’s pushing the change in overdraft policies?
Among the banks updating their policies, many cite “consumer-friendly practices” and inclusive banking as the driving forces behind the changes.
But experts say it’s not that simple. “While some banks have framed their recent decisions to discontinue overdraft fees as part of commitments to advance racial equity, these decisions coincide with competition from tech companies and threats of federal regulation and oversight,” Friedline says.
Fintech companies offering no-fee banking solutions have been gaining ground in recent years. This industry is now worth $26.5 trillion in 2022 and expected to have a compound annual growth rate of nearly 6%. Goldman Sachs estimated in 2015 that the fintech sector could eventually disrupt $4.7 trillion of revenue from traditional banking.
In addition to facing increased competition, regulators are also looking closely at overdraft and NSF fees. The CFPB launched a broad review of fees charged by banks, credit unions, and other financial companies in January, asking the public to weigh in as well. The inquiry will help the agency craft rules, issue industry guidance, and focus supervision and enforcement resources to curb the excessive levying of these fees.
“Large banks haul in huge sums in fees from retail customers,” CFPB director Rohit Chopra said earlier this year. “Junk fees often act as penalties, like with non-sufficient funds and credit card late fees, rather than compensation for a legitimate service.”
But many in the banking industry have pushed back on this characterization, saying restricting overdraft fees could create more challenges than it solves for consumers. "The demand for overdraft services is based largely on
customer need and choice and for many, is the last viable source of short-term liquidity," David Pommerehn, senior vice president and general counsel of the Consumer Bankers Association said recently.
Lawmakers have also put forward bills that would limit these fees. Senators Cory Booker (D-N.J.) and Warren proposed the Stop Overdraft Profiteering Act of 2021, which aims to eliminate NSF fees and limit the number of overdraft fees levied—as well as stipulating that these charges need to be “reasonable.”
Rep. Carolyn Maloney (D-N.Y.) has also repeatedly introduced bills to reform overdraft policies, most recently in the form of the Main Street Growth Act. However, neither of these bills have received a vote or progressed forward.
In the meantime, consumers do have the option to opt-out of overdraft coverage and protection programs—and they should take advantage of that, Smith says.
“Customers should just take every precaution that they can and explore the possibilities with the institutions that they have currently, just because changing banks can take some time,” Smith says. If that doesn’t cut down the fees, it may be time to look into banks that offer checking accounts without monthly fees or overdraft fees, including Key Bank’s Hassle-Free Account and Discover Bank’s checking account.
“People are just under an awful lot of financial stress right now. But making sure to stop the leaking, via safer accounts or opting out of overdraft, are really good measures,” Smith says.
This story was originally featured on Fortune.com