One of life’s biggest annoyances — getting hit with a hefty overdraft fee when the bank covers a transaction that’s bigger than your account balance — is getting a little less annoying. More and more U.S. banks are rolling back or even eliminating the dreaded overdraft fee.
Bank of America is the latest U.S. bank to provide customers some fee relief. The nation’s second-biggest bank (ranked by total assets) said it was slashing its overdraft fee from $35 to $10 beginning in May, as well as doing away with its non-sufficient funds (NSF) fee in February. (An NSF fee is assessed when the bank rejects a transaction, such as a bounced check, that it knows will create a negative account balance.)
The Bank of America fee cuts aren’t the first from the banking industry, which has received harsh criticism for them from consumer advocates and congressional lawmakers. Capital One announced in December that it was completely eliminating overdraft and NSF fees in early 2022, and in June, Ally Bank, the largest digital bank in the U.S., eliminated overdraft fees on all its accounts. Back in the middle of 2019, Discover was a first mover when it got rid of all fees on certificates of deposit, and checking, savings and money market accounts.
“It’s great for the consumer, absolutely,” says G. Michael Moebs, economist and CEO at economic research firm Moebs Services. “Any move by a major player [to reduce fees] — and Bank of America is a major player — is very significant.”
Overdraft fees are among the most expensive and common fees charged by banks. The national median (meaning half charge more and half charge less) overdraft fee is $30, according to Moebs Services’ most recent survey of 3,309 depositories.
Unfortunately, these fees aren’t going to go away entirely anytime soon. In fact, a dozen of the 16 largest retail banks still charge overdraft fees ranging from $34 to $37.50, according to a recent analysis by personal finance site ValuePenguin.
The financial hit to account holders is sizable. Consumers forked over an estimated $11.68 billion in overdraft-related fees in 2019, according to a report released in June by the Center for Responsible Lending. If you include both overdraft and NSF revenue collected by banks in 2019, the total fees consumers paid soar to an estimated $15.47 billion, according to a December report by the Consumer Financial Protection Bureau (CFPB), which was created by the U.S. government in 2010 in the wake of the financial crisis.
Who gets hit the most
Here are key findings of a CFPB study that looked at overdraft and NSF fees paid by opted-in customers, or those that give a bank the OK to charge them a fee to cover overdrafts:
- Most overdraft fees are paid by a small fraction of bank customers: 8 percent of customers incur nearly 75 percent of all such fees.
- Overdraft and NSF fees account for about 75 percent of customers’ total checking account fees and average over $250 per year.
- Transactions that lead to overdrafts are often quite small. In the case of debit card transactions, the median amount that leads to an overdraft fee is $24.
- Most consumers who overdraft bring their accounts positive quickly, with more than half becoming positive within three days.
- The propensity to overdraft generally declines with account holder age, with 10.7 percent of the 18 to 25 age group having more than 10 overdrafts per year, but only 2.8 percent of the 62 and over age group falling into this category.
It’s also common for some banks to charge multiple overdraft fees on a given day, so it’s not unheard of for an account holder to incur three overdraft fees in a day, even if by accident, and get hit with $100 or more in fees, says Chanelle Bessette, banking specialist at personal finance site NerdWallet. “Overdraft fees can be more than just one-hitters,” she says. “They can add up to being crazy amounts over time.”
Not surprisingly, overdraft fees are a big turnoff for customers, especially for account holders already experiencing financial distress. “Overdraft fees tend to hit people when they are already down, which is what makes them particularly frustrating for people,” Bessette says. “To get punished for a situation that is already tough can be really challenging. Having lower fees obviously lifts the load from consumers’ minds to not have to worry as much” about occasional account overdrafts.
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Peer pressure driving fees lower
For years now, banks have been under public pressure from lawmakers and consumer protection advocates to do away with fees that statistics show prey on households least able to absorb them. In the past year, for example, more than 4 of 10 (43 percent) “financially vulnerable households” with checking accounts reported having been charged overdraft fees — with 9.6 overdrafts on average, according to the Financial Health Network. The report also found that low- to moderate-income households are 1.8 times more likely to have overdrafts than higher-income households.
“This important step is way overdue,” says Leigh Phillips, chair of the CFPB Consumer Advisory Board and president and CEO of SaverLife, a nonprofit company that helps working families achieve prosperity through savings. “For too long, too many banks have profited from those who can least afford to pay, charging excessive fees that can trap consumers in a debt cycle or force them to leave the financial mainstream completely. Your bank should contribute to your overall financial stability and health, not strip wealth from your account with excessive fees,” Phillips says. “There is simply no reason for high-cost overdraft fees to exist.”
The rise of upstart online banks, such as Ally Bank, as well as so-called “fintech” companies and “neobanks” that charge lower fees and pay higher interest on cash deposits, has pressured traditional banks to pare back fees to retain customers and attract new ones, says NerdWallet’s Bessette. “The marketplace is just much more competitive for banks than it has ever been,” she says. “Overdraft fees are such a frustrating thing that if you can join a bank that’s never going to put you through that, it’s a really desirable thing.”
Still, with some banks already getting rid of fees altogether, Bessette says she was surprised Bank of America didn’t eliminate the annoying and costly overdraft fee altogether.
But the trend toward lower fees looks like it is here to stay, and the latest fee cut by a market behemoth like Bank of America could prod other banks to do the same, says Greg McBride, chief financial analyst at Bankrate.com. “This will ratchet up pressure on other large national and regional banks to take similar steps,” McBride says. “For the small share of accountholders that generate repeated overdrafts, the wind is blowing in your direction and a broader trend of relief on overdraft fees is afoot.”
Adam Shell is a freelance journalist whose career spans work as a financial market reporter at USA Today and Investor’s Business Daily and an associate editor and writer at Kiplinger’s Personal Finance magazine.