After years of public pressure and increasing competition from tech-driven challengers, big banks are finally dropping punitive overdraft fees. Some of the country’s largest financial institutions, including Bank of America, Capital One, and Wells Fargo, have recently announced plans to eliminate or reduce overdraft and non-sufficient funds (NSF) fees.
Overdraft services, which started as a convenience when check payments were more common, have turned into a predatory practice. As the Consumer Financial Protection Bureau (CFPB) has reported, these fees – which are often larger than the original overdraft – can amount to paying an interest rate of more than 10,000 percent. The CFPB estimates consumers paid $15.5 billion in overdraft and NSF fees in 2019 alone. Most of these fees are paid by those who can least afford them, creating a debt trap for financially struggling consumers.
As the CEO of SaverLife, a nonprofit dedicated to financial health, and the Chair of the CFPB’s Consumer Advisory Board, I am all too familiar with the negative impact these fees can have on the most financially vulnerable.
SaverLife members are 59% people of color and earn an average of $25,000 per year. They are small business owners, essential workers, educators, and more, who are working to build a better life for themselves and their families. They face many financial challenges, including fluctuating incomes and unexpected expenses, which can make avoiding overdraft fees nearly impossible.
The CFPB has found that 9% of account holders pay close to 80% of overdraft fees and are charged more than 10 overdraft fees annually. They are primarily people with low incomes, already struggling to make ends meet.
Our research shows that even savings as small as $100 can help people build financial security and prepare for the unexpected. Yet in 2019, SaverLife members who overdrafted their accounts paid almost three times this small savings amount over the course of the year—$274—in overdraft fees throughout the year. Your bank or credit union should be a trusted partner in your financial health, not a contributor to your financial distress.
Overdraft fees have allowed banks to profit from people with low incomes, but they have also caused banks to lose out on business. These practices have forced many people with low incomes to forgo traditional banking options altogether. In 2019, the Federal Deposit Insurance Corporation (FDIC) found that 5.4% of U.S. households were unbanked. This gap is even more significant for SaverLife members: 27 percent say they don’t have a traditional bank account.
Christina, a SaverLife member from South Dakota who works full-time at a manufacturing plant, doesn’t have a checking account for one simple reason.
“I like using savings accounts and my prepaid credit card instead because I can’t overdraft them, and there are no fees that I have to pay,” Christina said. “The $30 fees added up quickly.”
Christina estimated receiving one overdraft fee a month before closing her checking account. Christina now uses a prepaid card to manage her expenses. Other SaverLife members report that they’ve paid as much as $900 in overdraft fees in as little as three months, causing severe damage to their finances.
In a 2020 poll, SaverLife members said the most important factor they consider when searching for a checking account is fee avoidance features. In addition, 45% of SaverLife members indicated they strongly agree that overdraft fees are a way to profit from people with low incomes.
Advances in technology provide a better way to help consumers manage common cash flow challenges that can result in overdraft. Customers can easily be alerted to low balances in their accounts that may trigger overdraft. Checking accounts can be linked to savings accounts to cover a cash flow problem if one arises. Or, as many challenger banks now offer, a small buffer amount can be made available to customers for free.
Eliminating or reducing overdraft fees is an important step: it helps those struggling financially to keep more of their money and put it toward food on the table, a roof over their heads, and a car to get to work. It also keeps people within the financial mainstream, providing opportunities to build wealth and financial stability.
For too long, too many financial institutions have profited from those who can least afford to pay, charging excessive fees that can trap consumers in a debt cycle or force them to leave the financial mainstream completely. In today’s world, where technology can easily predict and prevent cash flow disruptions, there is simply no reason for high-cost overdraft fees to exist.
Leigh Phillips is the President & CEO of SaverLife, a national nonprofit that helps working families achieve prosperity through savings.