Are the days of overdraft fees almost over?
Dreadful bank fees are falling, even as the share of households paying them has remained the same, new financial research shows. And banks are increasingly providing options like loans in small installments to their customers.
Banks charge overdraft fees to cover shortfalls when customers spend more than the amount in their checking accounts. (Banks may also charge “insufficient funds” fees as a penalty if a payment bounces.) Once introduced as a courtesy, overdrafts became a lucrative source of bank revenue.
But for a variety of reasons, including pressure from regulators, banks are holding back on charging fees. Last year, bank revenue from overdraft and similar fees fell an estimated 6 percent to $9.9 billion by 2021, and remains “far below” the retrospective level of about $15.5 billion. a report From the Financial Health Network, a nonprofit focused on financial stability.
typical overdraft fee $15, according to Moebs Services, a financial research firm, half the amount it was two years ago. (Its calculations are based on more than 3,600 institutions, including banks, credit unions and financial technology companies.)
experts say many factors Factors behind the decline include consumer backlash and competition from new digital money tools, in addition to scrutiny from financial regulators. consumer financial protection bureau is scrutinizing fees for financial and other services, and considering updating overdraft rules, prompting some banks to make changes.
Other steps banks are taking to reduce the burden of overdraft fees include giving customers a one-day “grace period” to cover losses before being charged; waive the fee on small overdrafts, such as spending more than $5 or $10; and limiting the number of overdraft fees charged in a single day.
“The changes over the past two years have been both big and positive for consumers,” said Alex Horowitz, project director of consumer finance at the Pew Charitable Trust.
Meghan Green, senior director of policy and research at the Financial Health Network, said while the downward trend is welcome, the share of households with checking accounts that paid overdraft fees last year remained unchanged through 2021 at 17 percent.
Banks still collected about $10 billion in overdraft fees last year, she said, mostly from “people who are struggling financially.” (The network’s estimate for bank overdraft revenue differs from the Consumer Financial Protection Bureau’s numbers, as the bureau’s figures reflect banks with more than $1 billion in assets, while the network also includes data from smaller banks and credit unions.)
Financially vulnerable families — those who have trouble paying bills on time, saving for emergencies and managing debt — are more likely to pay fees, the network found. Nearly half of those households reported paying overdraft fees in the past year, compared to only 4 percent of financially healthy households.
Vulnerable households, which are disproportionately Black and Latino, are also 10 in 10 more likely to report paying overdraft fees. Frequent overdrafters are more likely to say that their previous overdraft was intentional – meaning they knew they lacked enough money to cover the payment, but made it anyway .
“They have very few other options,” Ms Green said.
He said that such consumers are also under financial stress from other sources. network is full of data Finhealth Expense Report, published Friday, found that total interest and fees from credit card balances rose more than 20 percent last year to an estimated $113.1 billion, as did higher card balances and higher interest rates. Ms Green said half of financially vulnerable cardholders have more than $5,000 in credit card debt, meaning higher rates are adding to the burden on those who are already struggling.
The network’s annual reports and overdrafts are based on aggregated 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 abolished overdraft charges?
Many large institutions have eliminated fees for insufficient funds, and some banks no longer charge overdraft fees, including City, associate bank, capital a And Alliant Credit Union, Other banks that have made changes include Bank of America, which last year reduced overdraft fees from $35 to $10.
Some banks no longer allow customers to spend more than they have in their accounts, but instead decline payments in excess of the account balance. Others generally allow overdrafts, but also offer special accounts that do not offer the service, for customers who prefer to avoid the possibility of fees.
consumer bureau tracks the bank overdraft policies on its website, and on financial sites such as Bankrate.com Present the list as well.
Are there any benefits of having an overdraft service?
Some people want what banks call overdraft “protection” to ensure that important bills will be paid even if the account is less than the required balance. Customers have to opt for overdraft for debit and ATM withdrawal. But banks don’t need your permission to charge overdraft fees for online payments or bounced cheques.
Consumers have another option. They can link a savings account or line of credit to their checking accounts, so money is automatically transferred if needed to avoid overdrafts. Some banks charge a fee when you tap backup funds, but many have eliminated such “transfer” fees as well.
Are there low cost options for those in need of short term loans?
More banks are now offering automatic micro loans to their customers. Six of the eight largest banks (based on number of branches) and seven of the largest credit unions offer this type of loan. bench, (The higher availability is partly due to guidance issued by financial regulator in 2020.)
Loans range from $5 to $1,000, depending on the bank, and can be taken away less expensive Instead of relying on repeated overdraft coverage or borrowing from other sources such as payday lenders, Pew found. For example, borrowing $400 over three months from a payday lender typically costs $360 in fees, while banks are charging $24 or less for loans of the same amount, Pew said.
The loans are considered secured because they are repaid in installments over several months instead of being paid in one go. Some banks approve borrowers based on their transaction history rather than their credit scores, so customers with low scores who may not qualify for traditional loans may benefit.
Another option: “Earned Wage Access” apps. The apps help employees avoid overdrafts by giving them quick access to some of their paychecks to pay bills, said Todd J. Zywicki, a professor at George Mason University’s law school and a research fellow at the university’s Law and Economics Center. “I’m a fan,” he said.
Some consumer advocates, however, recommend caution because some apps may charge fees for faster delivery of money, they said. Some encourage users to pay an optional fee based on a percentage of the advance.
