The federal Consumer Financial Protection Bureau is taking a harder look at banks that make a lot of their profits by charging customers big fees when their accounts dip below zero.
That announcement accompanied new research charting the banking industry’s growing reliance on overdraft fee revenues, which often further destabilize the finances of already-vulnerable people.
“Large financial institutions are still hooked on exploitative junk fees that can quickly drain a family’s bank account,” CFPB Director Rohit Chopra said during a recent press call.
The practice of allowing people to temporarily exceed their balance was seen as a customer service that came with a relatively modest cost. But overdraft fees have ballooned as financial institutions rely more on them to increase profits, according to the CFPB.
The nation’s biggest banks charge an average overdraft fee of $34, typically charged for each transaction where insufficient funds are available. Credit unions averaged $27.64.
“While many checking accounts are marketed as free, they are heavily offset by these hidden, opportunistic penalties that take advantage of complex and confusing rules around overdraft,” Chopra said. “Many American families end up paying large banks large fees for the privilege of holding their money.”
Banks continue to rake in billions of dollars from the fees, even after new federal regulations introduced in 2010 put limits on some of the most predatory overdraft policies.
From 2015 to 2019, overdraft fee revenue among banks with assets over $1 billion grew steadily, significantly outpacing the growth in basic account maintenance fees as a source of revenue. Bank profits from ATM withdrawal fees declined.
Overdraft revenues dipped in 2020. CFPB research suggested the arrival of stimulus money buoyed the bank accounts of many frequent over-drafters. Nonetheless, banks continued to rake in massive profits from the fees.
“Indeed, the big banks harvested billions ... in overdraft fees off Americans during the pandemic,” Chopra said.
For decades, advocates have pointed to the role overdraft fees can play in undermining financial stability for folks living paycheck to paycheck.
“But there’s been growing research and focus on this as something that is well within the power of banks and the financial service system to do something about,” said Ann Baddour, who directs the Fair Financial Services Project for the watchdog Texas Appleseed.
Beyond the roughly 1.4 million Texas households living below the poverty line, an additional 2.9 million Texas families and individuals are living paycheck to paycheck, according to the United Ways of Texas.
That figure has been growing over the years, as wages fail to keep pace with the cost of living. By 2018, more than 44% of Texans had little to no cash on hand to mitigate a higher-than-usual utility bill or delayed paycheck.
“It’s not the fact of the service, but it’s the amount of the fees and how these mount,” that causes “devastating effects” for low-income people, Baddour said.
The cost of these fees can also push people out of the banking system, facing account closures and even debt collection lawsuits.
Young people, who often have weaker financial literacy, are particularly vulnerable, Baddour said.
But anyone living close to the financial edge can easily overdraft. One mistimed payment can push an account into the red, Baddour said, queuing up snowballing setbacks with each new debit card swipe or Venmo transfer.
“It can be catastrophic,” Baddour said. “They’re swiping and swiping and buying a coffee here and a maybe a muffin, maybe buying some toilet paper at the grocery store, and suddenly these $20 or $30 of purchases have ballooned into $200 because of these kinds of fees”
The burden of overdraft fees is also startlingly concentrated: The CFPB found that just 9% of customers pay 80% of the fees.
Three megabanks – JPMorgan Chase, Wells Fargo and Bank of America – were responsible for 44% of the overdraft fees reported in 2019, according to the bureau’s report.
“Rather than competing on transparent, upfront pricing, large financial institutions are still hooked on exploitative junk fees that can quickly drain a family’s bank account,” said the CFPB’s Chopra.
Smaller banks tend to be less reliant on overdraft fees, according to the report, but there are some startling exceptions.
The Brookings Institution identified several small banks – including The Woodlands-based Woodforest National Bank and Killeen-based First Convenience Bank – whose business model only works with massive overdraft fees. The banks derive so much revenue from overdraft fees that it offsets losses in other areas.
“We have a clear market failure here,” Chopra said, promising that the CFPB, “will be enhancing its scrutiny of banks that are heavily dependent on overdraft fees.”
That enhanced scrutiny will include legal action against large financial institutions whose overdraft policies violate the law and examinations of banks that rely heavily on overdraft fee revenues for their profits and charge excessive fees. Chopra said the CFPB is also looking at ways to make it less of a headache for people to transfer their accounts to banks without overdraft fees.
“If America can shift to an open banking infrastructure, it will be harder for banks to trap customers into an account for the purpose of fee harvesting,” Chopra said.
Texas Appleseed’s Baddour praised the renewed attention from the feds on this issue, saying that it usually takes a combination of government regulation and market dynamics to minimize harmful banking practices.
She points to a growing realization in the industry that financial institutions can remain profitable without charging exorbitant overdraft fees.
Capital One, one of the ten largest banks in the country, announced that they’ll stop charging overdraft fees in 2022. Ally, an online bank, eliminated the fees earlier this year.
She credits a pilot program launched during the Obama administration by the Federal Deposit Insurance Corporate for helping to shift perspectives inside the industry.
“A lot of people can be successful in managing their account with just a little bit of help or structural support so that it’s not set up where every small mistake results in a potentially very high-cost fee.”
KERA’s One Crisis Away project is supported in part by grants from Communities Foundation of Texas and Texas Women’s Foundation.
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Got a tip? Christopher Connelly is KERA's One Crisis Away Reporter, exploring life on the financial edge. Email Christopher at cconnelly@kera.org.You can follow Christopher on Twitter @hithisischris.
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