The Not-So-Small Impact of Overdraft Fees, and How to Stop Them

It Adds Up

A study from consulting company Oliver Wyman shows overdraft fees are big business for major US banks. While many people likely classify them as an annoyance, the fees generated are responsible for more than half of the profits derived from mass-market consumer checking accounts.

Banks and credit unions collected $15.5 billion in 2019 through overdraft and insufficient funds fees, per the Consumer Financial Protection Bureau. The government agency argues these fees are a significant burden for lower-income consumers, threatening to keep people out of banking entirely. Their research shows that people who pay over 10 such fees throughout the course of the year pay $380 total annually. Moreover, they account for close to 75% of all overdraft fees.

How It All Started

The true origin of overdraft fees goes back almost 300 years when the Royal Bank of Scotland (NWG) struck a deal with a merchant allowing him to withdraw funds beyond what was available in his account.

In more modern times this fee system became a cash cow for banks all over the world. A 2003 report from the National Consumer Law Center laid that out in detail. It showed if a customer pays one non-sufficient-funds fee per month they’re as profitable as an account that maintains a $12,000 average balance.

Stimulus checks kept balances higher, and pandemic lockdowns led to fewer shopping opportunities, so fewer fees were collected in 2020 and 2021. That said, Bank of America (BAC), JP Morgan Chase (JPM), and Wells Fargo (WFC) each posted over $1 billion in annual fees both years.

Future of Fees

A number of banking institutions have announced they will either eliminate overdraft fees or reduce the amount charged. Capital One Financial Group (COF) and Citigroup (C) have agreed to ditch them entirely. Bank of America lowered its overdraft fee from $35 to $10. Wells Fargo has said it will end fees charged for bounced checks.

Usually customers can opt out of overdraft protection. Some banking institutions make a point of noting they don’t charge overdraft fees. Amid the growing trend, it could be worth your time to take a close look at all the terms and conditions before choosing who to bank with.

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