Dollar Scholar asks: Why are banks really getting rid of overdraft fees?

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As a child, he was an extremely picky eater. He would order a cheeseburger at Steak ‘n’ Shake and sheepishly ask the waiter to skip the ingredients one by one: “No tomato or onion, please. Also, no pickles. Oh sorry, can I get that without mustard too?

My palate thankfully expanded later, one of the many changes of growing up. But even as an adult, I’m still surrounded by change. Lately, for example, I keep reading stories about banks change their policies on overdraft fees…or remove them entirely.

There’s been a lot going on: Ally announced it would waive overdraft fees in June 2021, then Capital One in December 2021. Bank of America, Wells Fargo and citi They changed their rules last year.

I used to take ingredients off my burger because I didn’t like the taste; I am less clear why financial institutions suddenly decided to change their approach to overdraft fees. Like, I assume it’s not out of the goodness of their hearts… right?

why the banks Really waiving overdraft fees?

First, let’s fix the terminology. When I spend more money than I have in my check account, I can find two types of fees that are similar, but different. Overdraft fees are triggered when the bank accepts a charge, pays it, and my balance goes negative. Insufficient funds fees, or NSF fees, arise when the bank denies the charge, effectively deciding not to pay it.

They’re usually around $30. Still, it adds up… especially since banks can collect fees multiple times in a single day.

Insufficient funds and overdraft fees are big money makers for banks. In 2019, financial institutions got $15.5 billion in NSF and overdraft fees from its customers. Even at the height of the pandemic in 2020, when many banks suspended their NSF/overdraft policies to help people during the economic downturn, they still raked in a mind-boggling $8.84 billion from fees.

“Historically, they were presented as a courtesy to consumers,” says Rachel Gittleman, manager of financial services for the Consumer Federation of America. “They are no longer that. They are a way for institutions to earn revenue.”

Clearly, there’s a big financial reason why banks wouldn’t want to remove fees. So what’s behind the pivot? Mostly public pressure, according to Gittleman. The practice is attracting more and more attention, and people are outraged by what they are learning.

Case in point: The Daily Show with Trevor Noah made a segment on overdraft fees in August. Within a month, the YouTube video racked up 1.3 million views and 2,400 comments — none of which were kind to the banks.

“You see top CEOs get criticized on TikTok” for also profiting from overdraft fees, says Joel Schwartz, a former bank executive who founded DoubleCheck Solutions, a fintech company focused on improving the overdraft/NSF fee system . It looks bad, and people aren’t happy: “It’s perceived as, ‘Hey, listen, you’re making a lot of money on this, but it’s at the consumer’s expense,’” he adds.

And that’s not to mention the increasing regulatory pressure.

The Consumer Financial Protection Bureau is back in full force after a quiet couple of years under President Donald Trump, and CFPB director Rohit Chopra is out for blood. Chopra – what money named one of its inaugural Changemakers — has started calling overdraft fees “junk fees.” he started breaking about them in December 2021…

…which, as you may recall from the beginning of this article, was coincidentally followed by announcements from various banks that they would be changing their overdraft rules.

TL; DR: The fees have “received some very fair scrutiny recently, and that, along with federal and state regulators taking a fresh look at overdraft fees,” has started something of a movement, says Gittleman.

The trend is very much based on facts. Time studies show Just 9% of accounts are frequent defaulters, meaning that they are overdrawn 10 or more times a year, that segment of the population generates nearly 80% of all overdraft revenue. Black, Latino and young consumers tend to be especially affected.

“These fees are disproportionately burdened and borne by those who have the least to lose,” says Gittleman, adding that unbanked Americans commonly cite the fees as reasons they left the system. “The cost to the consumer is much higher than what it costs a bank or financial institution to cover it.”

One of the most unpopular aspects of overdraft fees is that they add up. They are also often affected by transaction reordering, where a bank changes the order of my payments to maximize the amount of money I need to deliver.

Let’s say I have $100 in my account, and I need to pay my $15 water bill, my $60 gas bill, and my $25 wifi bill. I do them in that order and I feel good because I know I’m going to get paid tomorrow, but no! I forgot about my $40 electric bill.

Instead of triggering the overdraft only on that last transaction (the one that took me over my $100 limit) and having me only owe $30 in fees, the bank can rearrange my payments from high to low. They are going to debit my account for the $60 and $40 bills first, triggering overdraft fees on my $25 wifi bill and $15 water bill, which led to me paying $60 in overdraft fees.

Schwarz’s double check it allows customers to reorder transactions on their own, giving people more transparency and control over their banking options because “the last thing you want is for payments to be declined,” he says.

Also, if you don’t want to risk overdraft fees, you can opt out through your bank. Just know that your card may be declined if you try to use it without sufficient funds in your account.

The bottom line

Banks are backing away from overdraft and non-sufficient funds fees in large part due to public pressure and the threat of regulation…not just because they randomly decided to do me a favor. Damned.

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