U.S. Banks Collected $6.13B in Overdraft Fees Over 9 Months, Yet Many Are Eliminating Them

Alhough U.S. banks took in $6.13 billion in overdraft revenue in the first nine months of 2021, according to S&P Global Market Intelligence data, many banks are moving to eliminate or reduce the widely unpopular fees. Lawmakers and regulators have been upping the pressure on banks to oust or ease the decades-old practice that disproportionately affects poorer Americans.

Banks collect overdraft fees when customers pay or withdraw more money than they have in their account. Even a $5 dollar purchase could cost someone $35 in fees if they lack sufficient funds in their bank account.

But some of the large banks across the U.S. are switching course on the practice by reducing the amount they charge after an overdraft, making it more difficult to trigger an overdraft fee or eliminating overdraft fees altogether.

Capital One has heeded calls to end overdraft fees. The nation's sixth-largest bank announced last week that next year, it would eliminate all overdraft fees.

The nation's largest bank by assets, JPMorgan Chase, hasn't opted to eliminate overdraft charges but has taken steps to ease their impact. The bank announced earlier this year that it would not charge customers with the fees if the amount overdrawn in their account was less than $50 by the end of the business day. It also said last week that customers would have 24 hours to reduce any overdraft totals back down to $50 or less so they can bypass a fee.

However, it's unlikely that the industry will remove such a revenue-generating measure completely.

"For many big banks, overdraft fees are still the steady, reliable, predictable, easy revenue that shareholders love," Rohit Chopra, director of the Consumer Financial Protection Bureau, said last week while instructing the government to take a closer look into overdraft procedures.

Overdraft Fee Reduction
After decades of raking in billions of dollars in overdraft fees, the biggest banks, under pressure from lawmakers and regulators, are slowly decreasing their reliance on the widely unpopular practice. Capital One, the nation's sixth-largest bank, has announced that it will end all overdraft fees in 2022. A Capital One mailing is seen in North Andover, Massachusetts, on July 22, 2019. Elise Amendola/AP Photo

Overdraft has its origins in banks providing a service — for a fee — to customers who may have not balanced their checkbook correctly and wanted a bank to honor a purchase. But the widespread use of debit cards changed this courtesy into a routine source of revenue. Some banks took advantage, for example, by reordering customers' transactions, deducting big transactions first so that smaller payments would then trigger multiple overdraft fees.

Overdraft fees, which started in the 1990s, became lucrative for the industry but at the same time made the banks a target for consumer advocates and their allies in Congress. After the financial crisis, Democrats put the CFPB and other regulators in charge of reining in overdraft fee revenues.

Frequent overdrafters, according to the CFPB, tend to skew toward those living paycheck to paycheck, and also are disproportionately Black and Latino. One of the top reasons given by Black and Latino Americans for choosing not to have a bank account, or being "unbanked," is that they are trying to avoid bank fees.

Industry revenue from overdraft fees held fairly steady until last year when banks waived fees across the board in the first months of the pandemic, when millions of Americans lost their jobs and businesses were shuttered. Revenue from overdraft fees fell to $8.82 billion last year from $11.68 billion in 2019, according to data collected by S&P Global Market Intelligence.

Despite an outcry from some Democrats, regulators in Washington aren't necessarily looking to do away with overdraft fees. In a speech last week, the acting head of the Office of the Comptroller of the Currency, Michael Hsu, said "low- to no-cost overdrafts" would allow those living paycheck to paycheck "to pay their bills on time, avoid high-cost alternatives and improve their credit profile."

Hsu said recent changes to overdraft policies by some banks could serve as a model for the industry.

Regional banking giant PNC launched new account features such as low-balance alerts and a grace period that will help consumers avoid overdraft fees. PNC also plans to limit overdrafts to one per day.

Pennsylvania-based PNC told investors to expect its overdraft fee revenues to be down $125 million to $150 million annually as the bank rolls out the "Low Cash Mode" product. PNC earned nearly $273 million in overdraft fee revenue last year, according to S&P Global.

From 2015 through 2020, JPMorgan annually led the industry in overdraft fees collected. Through the first nine months of 2021, Wells Fargo took in the highest amount of overdraft fees, slightly more than $1 billion, according to S&P Global.

Back in June, Ally Financial, the 18th largest bank by assets, said it would get rid of overdraft fees across all of its products. Ally specifically cited the racial inequity seen with overdrafts as a reason to stop charging the fees.

"It was the right thing to do," said Diane Morais, president of consumer and commercial banking products at Ally Bank.

Ally earned relatively little from overdraft fees. The bank told investors that getting rid of overdraft fees would have no material impact on its profits.

"This is likely a revenue line item that deteriorates over the long-term and banks will need to find other areas of fee revenue to offset this downward trend," said Kyle Sanders, an analyst at Edward Jones who covers Wells Fargo, PNC and several other large retail banks.

One way that banks will likely make up a drop in overdraft fee income could be a return to monthly account fees, which would be an industry shift after decades of advertising "free checking" to their customers. Both Wells Fargo and Bank of America charge $5 a month to use accounts that do not allow customers to overdraft.

The Associated Press contributed to this report.

Chase Bank
The nation’s largest bank by assets, JPMorgan Chase, hasn’t opted to eliminate overdraft payments, but has taken steps to ease their impact. A Chase logo is attached to an exterior wall at a bank location, in Dedham, Massachusetts, on Nov. 29, 2018. Steven Senne/AP Photo