Banks Rethinking Overdraft Fees

Banks Rethinking Overdraft Fees

Capital One Bank has set off a new chapter in the continuing squabble over overdraft fees, the expensive and highly profitable fees banks charge when customers’ accounts dip below zero. Democratic Senator Elizabeth Warren called on other banks to follow suit and regulatory agencies threatened action.

The bank’s CEO, Richard Fairbank, said in a memo to staff that the service will be free but customers will have to opt into it and show a pattern of steady deposits.

“We will look at customers’ behavior to make sure they don’t overdraft frequently,” Fairbank said in the memo. “We don’t want our customers becoming reliant on spending money that they don’t have.”

“Bank overdraft fees snatch billions from struggling families & even during this pandemic, big banks raked in billions from this abusive practice,” Warren wrote in a tweet. The Massachusetts lawmaker earlier this year criticized JPMorgan Chief Executive Officer Jamie Dimon as “star of the overdraft show.”

Bank overdraft fees snatch billions from struggling families & even during this pandemic, big banks raked in billions from this abusive practice. This is a good move by @CapitalOne. Big banks like @JPMorgan should do the same.

— Elizabeth Warren (@SenWarren) December 1, 2021

As the country’s sixth-largest retail bank, Capital One is the biggest yet to make the change. It follows a similar announcement from Ally Financial.

Overdraft fees add up

The fees add up for consumers – and for banks as well. A new study from the Consumer Financial Protection Bureau this week found banks collected more than $15 billion in overdraft and non-sufficient funds (NSF) in 2019.  

Three banks – JPMorgan Chase, Wells Fargo, and Bank of America – brought in 44% of the total reported that year by banks with assets over $1 billion.

“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” said CFPB Director Rohit Chopra in a news release. “We will be taking action to restore meaningful competition to this market.”

Previous CFPB research has shown that overdraft presents serious risks to consumers, with under 9% of consumer accounts paying 10 or more overdrafts per year, accounting for close to 80% of all overdraft revenue.


Capital One’s approach

Under Capital One’s plan, customers can choose whether or not to access overdraft protection. All customers currently enrolled in overdraft protection will be automatically converted to no-fee overdraft on the launch date in early 2022, the bank said. Eligible customers who are not currently enrolled can enroll at any time.

For customers not enrolled, transactions that would overdraw an account will be declined and no fees will be assessed.

“Long ago, we set our sights on reimagining banking. Our award-winning checking accounts already feature no monthly fees and no minimum balance requirements. Eliminating overdraft fees is another step in our effort to bring ingenuity, simplicity and humanity to banking,” CEO Fairbank said.

“Capital One’s complete elimination of overdraft and NSF fees is a landmark moment for American families,” said Lauren Saunders, Associate Director, National Consumer Law Center. “This move by Capital One will have tremendous benefits for the most vulnerable consumers. It’s critical we keep working to make the banking system more inclusive and fair for all.”

Saunders said other banks should get on board.

“If Capital One can do this, other banks can do this,” Saunders said in a Bloomberg interview. “I certainly hope that other banks will follow Capital One’s lead and get rid of these abusive fees.”

Capital One said the move is likely to cost $150 million a year in revenue. The firm collected $93 million in overdraft-related service charges last year, according to filings with regulators.



CFPB plans future enforcement actions

The CFPB said it will be “enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees.”

In recent years, the CFPB ordered TD Bank to pay $122 million in penalties and customer restitution, and ordered TCF Bank to pay $30 million in penalties and restitution.

Consumers seeking help dealing with overdraft and NSF fees can submit a complaint to the CFPB. Advice on managing bank accounts and avoiding fees is available on the CFPB’s website.