Are the days of overdraft fees coming to an end?
Fearful bank charges are falling even though the proportion of paying households remains the same, according to a new financial survey. And banks are increasingly offering alternatives to customers, such as small installment loans.
Banks charge an overdraft fee to cover the shortfall when a customer spends more than the amount in the checking account. (Banks may also charge “insufficient funds” fees as a penalty for refusing to pay.) Once offered as a courtesy, overdrafts have grown into a lucrative source of income for banks.
But for a variety of reasons, including pressure from regulators, banks are pulling back from collecting fees. Bank revenues from overdrafts and similar fees last year fell an estimated 6% from 2021 to $9.9 billion, still “well below” pre-pandemic levels of about $15.5 billion, it said. report By the Financial Health Network, a non-profit organization focused on financial stability.
Typical Overdraft fee Mobus Services, a financial research firm, said the price was $15, half the price two years ago. (This calculation is based on his 3,600+ institutions, including banks, credit unions, and financial technology companies.)
experts say some factors Moreover, scrutiny from financial regulators, including consumer backlash and competition from new digital money tools, is behind the decline.of Consumer Financial Protection Bureau is scrutinizing fees for financial and other services and is considering updating overdraft rules, prompting some banks to make changes.
Other steps banks are taking to ease the burden of overdraft fees include giving customers a one-day “grace period” to cover their losses before charging them. Waives fees for small overdrafts, such as $5 or $10 overspending. Limit the number of overdraft fees that can be charged per day.
“The change over the past two years has been significant and positive for consumers,” said Alex Horowitz, director of consumer finance projects at Pew Charitable Trust.
While the downward trend is welcome, the percentage of households with checking accounts who reported paying overdraft fees last year remained unchanged from 2021, said Megan Greene, senior director of policy and research at the Financial Health Network. %was.
He said banks still collected about $10 billion in overdraft fees last year, mostly from “people who are struggling financially.” (The network’s bank overdraft income estimates differ from the Consumer Financial Protection Bureau’s figures, which reflect banks with over $1 billion in assets, but the network includes smaller banks and credit This is because union data is also included.)
Financially vulnerable households—those who have difficulty paying their bills on time, saving for emergencies, and managing their debt—are much more likely to pay the bills, according to the network. found. Nearly half of these households reported paying overdraft fees last year, compared to just 4% of financially healthy households.
Vulnerable households, who are predominantly black and Latino, are more likely to report paying 10 or more overdraft fees. Frequent overdrafters were much more likely to say that their last overdraft was intentional, meaning they knew they didn’t have enough funds to cover their payments, but Still paid for it.
“They have little choice,” Green said.
Such consumers also face financial burdens from other sources of funding, she said.Data from network full data FinHealth Spending ReportTotal interest and fees from credit card balances increased by more than 20% last year to an estimated $113.1 billion, according to a paper released Friday. Nearly half of financially vulnerable cardholders have credit card debt of $5,000 or more, Green said, adding that rising interest rates are adding to the burden on those who are already struggling. said it meant.
The network’s annual report and overdraft summary are based on public bank data and a January survey of more than 5,000 household financial decision makers.
Here are some questions and answers about overdraft fees:
Which banks have eliminated overdraft fees?
Many large financial institutions have eliminated fees for insufficient funds, and some banks no longer charge overdraft fees. city, Ally Bank, capital one and alliant credit union. Other banks that have made changes include Bank of America, which lowered overdraft fees from $35 to $10 last year.
Some banks no longer allow customers to pay more than they have in their account, and instead refuse to pay more than their account balance. Some also allow overdrafts in general, but offer special accounts with no service for customers who want to avoid incurring fees.
Department of Consumer Tracking Banks Overdraft Policy Websites, financial sites, etc. Bankrate.com We also provide a list.
What are the benefits of using the overdraft service?
Some may want what banks call overdraft “protection” to ensure important bills are paid even if the account falls below the required balance. Customer must opt-in to debit and overdraft his ATM withdrawals. But banks don’t need your permission to charge overdraft fees in lieu of online payments or dishonored checks.
Consumers have another choice. Savings accounts and lines of credit can be linked to checking accounts, so funds are automatically transferred when needed, avoiding overdrafts. Some banks charge a fee when withdrawing backup funds, but many have also eliminated such “transfer” fees.
Are there low-cost alternatives for people in need of short-term loans?
More and more banks are now offering automated microfinance to their customers. Six of the eight major banks (based on number of branches) and seven major credit unions offer such loans, according to the report. pew. (The increased availability is partly due to financial regulators in 2020. )
Loan amounts vary by bank, but range from $5 to $1,000, and can be much higher. less expensive Pugh found it better than relying on recurring overdraft coverage or borrowing from other sources of funding, such as payday lenders. For example, a $400 loan from a payday lender for three months would normally cost $360 in fees, but banks charge less than $24 for the same amount of loans, Pugh said. rice field.
Loans are considered safer as they are repaid in installments over several months rather than in one lump sum. Some banks approve borrowers based on transaction history rather than credit score, so even low-scoring customers who might not qualify for a traditional loan benefit.
Another option is the Earned Wage Access app. Todd J. Ziwicky, a professor of law at George Mason University and a researcher at the university’s Center for Law and Economics, said the apps could help workers pay bills with early access to a portion of their paychecks. , said it helps avoid overdrafts. “I’m a fan,” he said.
But some consumer advocacy groups are urging caution, as some apps may charge a fee to receive money quickly. Some encourage users to pay option fees based on a percentage of the upfront payment.
