Multiple US banks are taking a stand with consumers and are amending their overdraft policies to scrap, and sometimes reduce, overdraft fees.
An overdraft occurs when a bank allows a customer to withdraw more cash than is in their account.
The bank pays the difference as a form of credit.
The Average Overdraft Fee Peaked at $33.58 in 2021
Overdrafts, even though they throw consumers a rope when they need one, can be costly. In 2021, overdraft charges – the cost your bank will charge you for entering your overdraft – hit an all-time high of $33.58, according to Bankrate. Most major US banks hit customers with such penalties, including Union Bank and Bank of America.
Changing the status quo surrounding overdraft fees will therefore save customers money. Capital One, the biggest US bank to announce that they will withdraw overdraft fees altogether, expect that this move will cost them around $150million annually. That is $150million cumulatively saved by consumers who have had to enter their overdraft.
While Some Banks Have Removed Overdraft Fees Altogether…
Some have increased their grace period or reduced their charges.
Meanwhile, other US banks who haven’t quite removed their overdraft fees, such as PNC, have nevertheless aided their borrowers by lowering these fees. Alongside this, PNC will now offer consumers a longer grace period to repay their debt before hitting them with charges, a move also being taken by JPMorgan Chase, which is the US’s biggest bank.
These moves are trailblazing, and are in the interest of the Consumer Financial Protection Bureau (CFPB) who are responsible for protecting consumers and making sure they are treated fairly. The CFPB has recently placed heavy focus on banks who bank on profits garnered from overdraft fees. With a total of $15.47 billion reaped from these fees in 2019 alone, it is a priority of the CFPB to mitigate these costs for consumers.
Changes to Overdraft Fees Represent Banks’ Reaction to Fintech Competitors
Of course, consumer protection has not been the sole catalyst driving the banks to make change. It is notable that fintech start-ups have provided a multitude of cheaper overdraft alternatives to the high street banks, and are shovelling money into promoting these accounts.
Fintech challenger bank Ally Financial is only example of a digital disruptor incentivising borrowers to move away from their high street banks. High street changes, therefore, represent a reaction to market behaviour, as well as a form of safeguarding those who bank with them.
Overdraft fees can be profoundly damaging to those who need their overdrafts in the first place. Overdrafts are entered when account-holders can’t afford to cover their costs with the funds available to them. It is unsurprising, therefore, that many overdraft users are those who struggle to make ends meet.
Added costs in the form of overdraft fees, therefore, have been targeted by many Democrat politicians, such as New York Congresswoman Carolyn Maloney, who are all striving to see these fees eliminated, placing added political pressure on banks. This new and welcomed approach should make borrowing less stressful and more economical for US consumers.