Banks make billions in overdraft and other ‘junk fees

WASHINGTON – If you have plenty of money, the occasional overdraft fee – or its nuisance cousin, the dreaded non-sufficient-funds fee – won’t break your bank.

But for a family living on the financial edge, the fees can be devastating. One overdraft fee of $35 can result in a cascade of charges that drain a bank account.

“In many cases, junk fees often act as penalties, like with non-sufficient funds and credit card late fees, rather than compensation for a legitimate service,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said during a recent press call.

“While it may make sense for banks to pass on the cost for extra services provided, many complain that these fees are far higher than the service is really worth.”

Under President Joe Biden, the watchdog agency – which was muzzled during the Trump administration – is targeting the type of “junk fees” that often drive low-income and minority customers from banks to predatory payday loan companies – and that have become a significant source of banking revenue.

In 2019, revenue from overdraft and non-sufficient-funds fees (typically $25 to $30) surpassed $15 billion, the CFPB said.

A 2019 study by the Federal Deposit Insurance Corp. found that half of unbanked Americans had a bank account at some point in the past.

Among the top reasons cited by many who checked out of the banking system were high or unpredictable account fees.

“We’ve seen that hidden and surprise fees can drive consumers out of the financial mainstream,” said Alex Horowitz, who guides research for the Pew Charitable Trusts’ consumer finance project. “They can lead to closed checking accounts.

“They do the most damage to households that have the least margin for error – so low-income households, low-asset households and households of color.”

A non-sufficient-funds fee, also known as a returned-item fee, is charged when a transaction or check is rejected because there isn’t enough money in the account to cover it.

An overdraft fee is charged when there are not enough funds but the transaction still goes through.

Horowitz said 5% of checking-account customers are paying 20-plus overdraft fees per year.

To put that in context, folks who get hit often with overdraft fees have average deposits of about $2,500 a month, which doesn’t give them much margin for error, Horowitz said.

“Overdraft fees can push household budgets over the edge,” he said.

The CFPB is soliciting public comment on how it can address the explosion of fees.

Comments can be emailed to federalregistercomments@cfpb.gov. The CFPB says it’s particularly interested in hearing from older and lower-income consumers, students, service members and people of color.

The Consumer Bankers Association, which represents the leading retail banks in the United States, pushed back on the CFPB’s characterization of the fees.

“Overdraft fees as a percent of total revenue across the industry made up less than 2 percent in 2019,” CBA President and Chief Executive Richard Hunt said in a statement.

This CFPB initiative comes as several large banks have reduced or eliminated certain bank fees.

Capital One, which is among the nation’s largest banks, said last year it would be eliminating all overdraft fees and non-sufficient-funds fees for its consumer banking customers.

In January, five major banks announced that they were eliminating or reducing account fees:

• Bank of America is getting rid of non-sufficient-funds fees beginning this month and will reduce overdraft fees from $35 to $10 in May.

The bank said customers won’t be able to overdraw their accounts at an ATM. Starting in May, also disappearing will be the $12 fee charged when funds from a linked account are used to cover transactions with the customer’s checking account.

• Wells Fargo announced that, by the end of the first quarter, customers will no longer pay a fee if the bank returns a check or electronic transaction unpaid because of insufficient funds.

The bank will also stop charging customers to transfer money between accounts to avoid an overdraft.

Additionally, starting in the third quarter, customers who overdraw their deposit account will have 24 hours to cover the overdraft before incurring an overdraft fee.

• U.S. Bank has eliminated certain fees for non-sufficient funds and by the end of the second quarter will allow an account to be overdrawn by $50 instead of $5 before triggering a fee.

The bank will also allow account-holders a day to deposit funds to avoid a fee when the negative balance is more than $50.

• Truist said it will introduce a personal checking account with no overdraft fees this summer and a $100 negative-balance buffer for qualifying clients.
• Regions Bank said it will eliminate its non-sufficient-funds fees by the end of the second quarter of 2022 and reduce the number of overdraft fees that can be charged per day on consumer banking accounts.

Pew estimated the total savings to consumers at just those banks could top $2 billion annually.

More banks are coming out with what they say are “enhancements” to their overdraft fee policies.

TD Bank announced Tuesday that its customers will be able to overdraw their accounts by up to $50 before incurring an overdraft fee.

If Horowitz is right, we might be seeing a seismic shift in the banking sector, with overdraft and related junk fees becoming a competitive disadvantage.

But if that doesn’t happen soon enough, I suspect the threat of more oversight by the CFPB might prompt other financial institutions to jump aboard this fee-elimination train.

And that’s just what a watchdog agency should be doing – pushing for change that helps consumers, especially those who are financially fragile.