Bank overdraft fees are common for consumers, but some banks want to change that. Are their goals entirely altruistic, or is it primarily a business decision that helps them more than their customers? Here’s what you need to know.

What is an overdraft fee?

An overdraft fee, or insufficient funds fee (NSF), is a charge imposed by a bank on a consumer’s account for any transactions that exceed the amount in their account. This could be anything from a few dollars to hundreds of dollars and can result in significant financial penalties that put you into a financial hole that’s hard to get out of. It’s even possible that bank overdrafts could impact your credit if you’re not careful.

Why are overdraft fees so common?

Banks utilize “liquid” funds to pay for credit cards and loans they give to their customers. When a bank doesn’t have enough liquidity, it creates a risk for the bank and its customers, as these debts can’t easily be repaid if things go bad. In other words, overdraft fees are one way that banks ensure they’ll have enough liquidity to repay their customers’ debts. It might sound counterintuitive (how do you get more money from someone who doesn’t have any?). Still, it is historically a successful deterrent tactic to ensure customers stay on top of their finances.

The movement to eliminate overdraft fees

Some banks are changing tactics and removing overdraft fees altogether. Ally Bank, an online bank, became the first to eradicate overdraft fees to help its customers stay afloat during the COVID-19 pandemic. However, it has since made the decision permanent on all checking and savings accounts.

Capital One became the first “large” bank to waive overdraft fees. JPMorgan Chase followed soon after by allowing customers an additional day to get a negative balance back to $0 before getting charged a fee. But why would these giant corporations decide to lose such a vital revenue stream?

Reasons a bank could remove overdraft fee policies

There are a few reasons why it might be in a bank’s interest to remove overdraft fee policies for checking and savings accounts:

  1. Customer loyalty – Having no fees could be a serious competitive advantage in the marketplace, making a bank more attractive to new and current customers.
  2. They can make up the cost with other products – Having a loyal customer start with a free checking account is an excellent way to start the customer journey into more expensive products. Customers will work with a bank they “like” when they’re ready for more products, making it easier to expand a customer’s spending with the bank.

For example, the guaranteed money from interest rates on a loan or credit card could more than make up for an occasional $35 fee, especially since there’s never a guarantee the customer will overdraft their accounts. Even if a customer activates a temporary 0% APR offer for a balance transfer card (which gives you the bonus that balance transfers can help your credit, too), statistically speaking, the bank will still make more money via expired offers and merchant charges.

  1. It keeps regulators off their backs – the Consumer Finance Protection Bureau is currently investigating Capital One for its “deep dependence” on overdraft fees. To avoid further scrutiny and fines, Capital One decided to eschew overdraft charges altogether, hoping it would satisfy the CFPB enough to move on.

The bottom line

Regardless of the reason, the new strategy banks are using to eliminate overdraft fees is a net gain for you as a customer.

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Contact Information:

Name: Michael Bertini
Email: [email protected]
Job Title: Consultant

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