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People hate overdraft fees. Banks are ditching or reducing them

Capital One has become the nation's largest bank to end overdraft fees for all of its customers. Federal regulators are taking a hard look at bank overdraft fees, which hit customers with lower incomes the hardest.
Richard Drew
Capital One has become the nation's largest bank to end overdraft fees for all of its customers. Federal regulators are taking a hard look at bank overdraft fees, which hit customers with lower incomes the hardest.

Updated January 11, 2022 at 12:43 PM ET

Bank of America, the nation's second-largest bank, says it's drastically reducing overdraft fees. Capital One is going a step further and getting rid of the fees altogether. The moves come as federal regulators are taking a tougher stance with banks charging these often hefty fees.

People get hit with overdraft fees when they overspend the balance in their checking account and the bank fronts the money for a few days.

The fees can seem unfair: You might buy a $2 cup of coffee and get hit with a $35 fee. And if you don't realize your account is empty and make a series of small purchases, you can quickly end up owing hundreds of dollars.

"Overdraft fees are really one of the most abusive forms of lending the banks engage in," says Lauren Saunders with the National Consumer Law Center. She says when it comes to regular loans, most banks don't charge people outrageously high interest rates. "But they do it hidden from view through overdraft fees."

Banks make billions from these fees

"We're the sixth-largest retail bank in the U.S. and this will affect every checking customer that we have," says Peter Boyer, a senior vice president at Capital One. He says the bank's millions of customers who already have what's known as overdraft protection will keep getting it, but it will be free.

"We recognize that customers have unexpected expenses and needs at times where their cash flows don't quite line up between expenses and income," Boyer says. "We really want to get our consumers to a place where they're living healthy financial lives."

Bank of America said it will reduce overdraft fees from $35 to $10 starting in May. Both banks are also eliminating so-called non-sufficient funds, or NSF fees, charged when people overspend with a transaction that isn't covered by overdraft protection.

All U.S. banks together make about $15 billion a year on overdraft and NSF fees, according to the federal Consumer Financial Protection Bureau. But the CFPB says about 80% of that comes from just 9% of customers who keep getting hit over and over again with upwards of 10 overdrafts a year.

'These are people who have low balances or are struggling paycheck to paycheck," says Saunders. "So in other words, the overdraft fees fall most heavily on the most vulnerable consumers."

By ending the fees, the banks will be taking a hit to their bottom line. Boyer says, "On an annual basis, Capital One is going to forego about $150 million." To put that in perspective, Capital One had $28.5 billion in revenue last year. On the plus side for Capital One, the move might bring in some more customers.

Overdraft fees are under scrutiny by regulators

Capital One says free overdraft protection should go into effect within three weeks. To get it, customers will have to make regular deposits. There are limits to how much money a customer can overspend. But there is no limit on the number of overdrafts.

Of course, paying a hefty overdraft fee can discourage overspending. So after the fees go away, if some customers start overspending regularly Capital One might tweak the rules.

Overdraft fees are being reconsidered throughout the industry. A smaller online bank, Ally Bank, recently ditched the fees. Some other banks have reduced them.

"It's an area of focus for many of the banks because of the increased regulatory scrutiny on overdraft fees," says Gerard Cassidy, an analyst with RBC Capital Markets.

The CFPB has recently signaled that it's going to be taking a hard look at banks charging these fees. So tougher regulation might be on the way. And Cassidy says more banks could decide to get out in front of that by voluntarily ending or reducing the fees. "That would not surprise me if you do see other banks follow suit."

Cassidy says overdraft fees account for only about 1% of revenue for most larger banks. "Generally speaking, it's not a major source of revenue for the banks," Cassidy says.

Lauren Saunders sits on an unpaid consumer advisory board for Capital One. She says Capital One probably makes more from these fees than many other banks because it has a lot of customers living paycheck to paycheck. So, she says, if Capital One can do this, other banks can afford to do it too.

Bank of America and Capital One both provide financial support to NPR. We report on them the same way we do on all other companies.

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NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.