Ally Bank has ended all overdraft fees. What does that mean for Charlotte’s banks?
If you’ve ever lost track of the amount in your checking account or accidentally paid your bills with a low balance, you’re likely familiar with overdraft fees: the $10 to $40 fee some banks charge customers for overdrawing their account.
The fees vary by bank, and can quickly add up to compound a negative balance and knock low-balance customers deeper into the red.
In the past year, they’ve also drawn scrutiny from lawmakers and advocacy groups for their impact on low-income Americans, especially during the financial hardships caused by the coronavirus pandemic. And in early June, Ally Bank announced that it was eliminating overdraft fees on all accounts, effective immediately.
But for other banks, it might not be so simple to consider making such a move.
“Fees from overdrafts remains an important revenue source of revenue for a lot of banks,” said Ken Tumin, founder and editor of DepositAccounts.com, a bank account comparison website owned by LendingTree. “I don’t think we’ll see the whole industry speeding to eliminate overdraft fees.”
Overdraft options
Though some banks might not end the fees, Tumin said, there’s been a “growing push” among banks to offer a broader range of products and services designed to help low-balance or overdraft-prone customers avoid excessive charges.
For example, Bank of America offers a SafeBalance Banking Account, an overdraft-free checking account with a $4.95 monthly fee that is waived for students under 24 and members of its rewards program.
The bank said it’s constantly looking for ways to help its customers achieve long-term financial wellness. The SafeBalance option, it said, is its fastest growing checking portfolio.
Wells Fargo offers a similar account. The bank also sends zero-balance alerts via email to help customers stay ahead of potential overdrafts, it shared in a statement.
And Truist customers have multiple options for reducing or minimizing fees, the bank said, including monitoring accounts through online and mobile banking and receiving text and email alerts regarding account balances and transactions.
“Our goal is to make it easy for our clients to understand their overdraft options for personal checking accounts,” the bank said.
The money banks earn from these types of fees is often a small portion of their total income.
For instance, in 2019, Bank of America took in nearly $1.6 billion in overdraft and non-sufficient fund fees compared to total income of $82.8 billion, according to a report from the Center for Responsible Lending, a nonprofit research and policy group based in Durham. Wells Fargo and Truist had similar proportions.
Still, Tumin noted that bank customers shouldn’t expect the fees to disappear completely anytime soon. In the meantime, the best way to avoid them is to keep an eye on their balance.
“It does require some responsibility on the consumer too,” he said. “Make sure you do track your balance and make sure you have money in your account.”
A costly mistake
Overdraft fees have long been marketed as a convenience or benefit for bank customers, Tumin said, as a way to help ensure account holders that bills or purchases could be completed even if their bank balance was low.
But overdraft costs have grown in recent years. According to financial research firm Moebs Services, the median overdraft fee for American banks was $20 in 2001. By last year, it had jumped to $30.
“It has been traditionally a very costly benefit,” Tumin said. “When they’re overused, these fees could quickly pile up.”
Critics argue that the fees disproportionately affect low-income bank customers living paycheck to paycheck, allowing financial institutions to make money off those struggling financially.
“It sounds obvious, but yes, low income people experience more overdrafts than higher income people,” said Peter Smith, a senior researcher at the Center for Responsible Lending. “We also know that for lower income folks, and often among them marginalized folks, the same amount of overdraft fees weighs more heavily.”
In a congressional hearing last month, Sen. Elizabeth Warren, D-Mass., confronted JP Morgan Chase CEO Jaime Dimon on the subject.
Warren stated that the bank had collected more than $1.4 billion in overdraft charges in 2020 and criticized the company for not waiving the charges during the course of the COVID-19 pandemic, per the recommendation of federal regulators. Dimon responded that the bank waived the fees upon request if customers were under financial stress due to the pandemic.
It’s not the first time that overdraft fees have been a target of criticism, Tumin said. “Unfortunately, it’s known for being that kind of fee that hurts those that can least afford it the most.”
