Banks quietly curb overdraft fees — long a target for Democrats

Aug 5, 2021
In The News

As Democrats work to eradicate overdraft fees, some banks are retooling their overdraft policies or eliminating the fees altogether on their own, moves that could help lower-income Americans save money.

In June, Ally announced it was getting rid of overdraft fees, while last month Synovus Financial said it’s looking to rely less on those fees for its checking accounts. They follow PNC, TD Bank, Fifth Third, Huntington Bancshares, and Regions Financial, all of which earlier this year limited overdraft fees by introducing new accounts or services or curbing when the fees are assessed.

Their efforts come as Democrats push the Overdraft Protection Act, which would prevent institutions from reordering transactions to increase fees and would limit overdraft charges to one a month or six a year.

“It would empower consumers, requiring that they proactively opt in to an overdraft account, the consumer would make the choice, not the institution automatically enrolling them,” said Rep. Carolyn B. Maloney (D-NY) at a June 30 press conference.

‘Now that fee is eliminated’

In 2020, Ally collected $5 million in overdraft charges. That only accounted for .07% of the bank’s total revenue, making the fee nominal to the company but impactful to its customers.

“We previously charged a $25 fee for items that were paid or unpaid,” said Anand Talwar, deposits and consumer strategy executive for Ally Bank. “Now that fee is eliminated.”

In July, Synovus Financial said changes to its overdraft policies for its checking accounts could come in the fourth quarter or early 2022, CEO Kevin Blair told analysts on a call. The company derived only 6% of its fee income from overdraft fees in the second quarter, according to American Banker.

“That will involve some product changes and some new digital tools and most importantly some education, but we'll do that.” Blair said.

PNC rolled out a new alert service to help people avoid overdrawing their accounts, while Huntington is providing a line of credit as an overdraft buffer. Fifth Third is launching a new low fee bank account, while TD Bank, Regions, and Cullen/Frost are limiting how overdraft fees are applied.

“We're going to have to get back to charging basic fees for basic products and be less reliant on some of the gotcha fees that historically have supported the industry,” PNC Financial Services Chairman and CEO William Demchak said last year.

Overdraft fees alone cost Americans an estimated $12.4 billion in 2020, according to Financial Health Network’s FinHealth Spend Report, with $7.3 billion shouldered by low- to moderate-income households, which often choose to simply not engage in traditional banking.

Roughly 1 in 4 low- to moderate-income households are unbanked, according to the Federal Reserve Bank of New York, with high fees often cited as the reason. This especially affects people of color.

“There is also a significant racial disparity in access to banking services, Latino households are more than twice as likely to be unbanked or underbanked and African American households are more than three times as likely to lack access to traditional banking services, compared to white households,” said Rep. Ed Perlmutter (D-CO), the chairman of the subcommittee on consumer protection and financial institutions, at a July 21 hearing.

Limiting overdraft fees would assist millions of Americans in their financial systems and allow for more flexibility in people’s financial situations.

“Overdraft fees increase the financial burden felt by families who are struggling with income volatility and income insufficiency,” Peter Smith, senior researcher at the Center for Responsible Lending, told Yahoo Money. “High fees add insult to injury, and make it difficult for families to weather difficult situations.”