By Elisabeth Buchwald
Banks are literally banking on you not having enough money in your account to cover your expenses. For many banks, that means they get to hit you up with an overdraft fee that typically costs $30 to $35.
For customers living paycheck-to-paycheck, overdraft fees are “a penalty for being poor,” said Pete Smith, a senior researcher at the Center for Responsible Lending, a consumer advocacy group.
These fees disproportionately affect Black and Latinx households, who are 1.9 times and 1.4 times more likely to incur overdraft fees, respectively, compared to white households, according to a June report published by the Financial Health Network, a nonprofit organization that receives funding from Citi Foundation.
In 2019, banks charged U.S. customers $15.47 billion in overdraft and non-sufficient funds fees, according to a report published Wednesday by the Consumer Financial Protection Bureau.
The same day the CFPB released its report, Capital One /zigman2/quotes/204480509/composite COF +1.46% announced it would “completely eliminate overdraft and non-sufficient funds (NSF) fees for all Capital One consumer bank customers,” according to a memo from the bank’s CEO, Richard Fairbank.
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The CFPB report said banks “rely heavily” on revenue from fees. JPMorgan Chase /zigman2/quotes/205971034/composite JPM +0.63% , Wells Fargo /zigman2/quotes/203790192/composite WFC +0.73% and Bank of America /zigman2/quotes/200894270/composite BAC +0.69% brought in 44% of the total overdraft fee revenue collected in 2019 by banks with at least $1 billion in assets.
All three banks didn’t respond to MarketWatch’s request for comment. Citigroup /zigman2/quotes/207741460/composite C +1.55% declined to comment; it charges $34 overdraft fees with the exception of one account offering that doesn’t charge overdraft fees but charges up to $10 a month if customers don’t meet certain criteria .
Spokespeople for JPMorgan Chase and Wells Fargo previously told MarketWatch that their banks provide services to help customers avoid overdraft fees.
Wells Fargo said it offers accounts with no overdraft fees. A JPMorgan spokesperson told MarketWatch that the CFPB’s data does not reflect changes it made earlier this year to “significantly” increase “the amount a customer can overdraw before overdraft fees are charged.” The bank also eliminated its insufficient funds fee earlier this year, the Wall Street Journal reported.
Will Capital One’s move to eliminate overdraft and insufficient fund fees lead other banks to slash theirs as well?
It’s “great news” that Capital One got rid of these fees, Smith said. “I hope more banks follow their lead,” he added, predicting that some banks will succumb to the pressure that Capital One’s move to eliminate fees puts on them.
Capital One followed in the footsteps of the online bank Ally, which stopped charging overdraft fees entirely in June, citing the toll the fees can take on Blank and Latino households.
One of the reasons that many banks haven’t stopped charging the fees already is that they’ve incorporated the fees they collect into their revenue models, Smith said. “It’s an easy, steady stream of money,” he said.
Meghan Greene, director of research at FHN, said Capital One’s move “is the most recent signal that the financial services industry is moving toward prioritizing the financial health of consumers.”
But “institutional change isn’t sufficient, there needs to be regulatory change,” Smith told MarketWatch.
CFBP Director Rohit Chopra promised just that.
“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” he said in a statement published on Wednesday.
“We will be taking action to restore meaningful competition to this market.”