This week, the online-only banking institution Ally Bank announced that it will no longer charge overdraft fees to its customers.
This is good news for their current or would-be customers who worry about bouncing a check or putting a charge on their debit card that they don’t have enough money for.
Sure, we’re never supposed to do that but sometimes it happens and historically, when it does, the bank makes a lot of money off of penalty fees.
Ally dropping its overdraft fees is impactful news for the banking industry as a whole, which makes billions off of overdraft and non-sufficient funds fees. Ally’s move may pressure other banks, including the long-established firms, to follow suit.
What Overdraft Fees Mean to Banking Industry
In early 2020, when the coronavirus pandemic struck, millions of people lost their jobs, and millions more had their work hours reduced. While the federal government launched financial aid programs, banks were encouraged to temporarily eliminate their overdraft and non-sufficient fund fees.
Many, but not all, banks and lenders complied. Bank of America, JP Morgan Chase and Wells Fargo each reported income of more than $1 billion from overdraft fees in 2020, according to The American Prospect.
Even among those banks and credit companies which did waive overdraft fees in 2020, those moves were always considered temporary, until June 3, 2021, when Ally Bank announced it was ending overdraft and non-sufficient fund fees permanently.
Most banks charge a $25 to $35 penalty per transaction so a consumer who had one busy but lousy day and needed overdraft protection, let’s say, five times. You can see how those charges add up. Previous to the pandemic, Ally assessed the penalty by the day ($25) rather than transaction.
What No Overdraft Fees Mean to You
“No overdraft fees’’ mean consumers will not be penalized for overdrawing their accounts.
What it does NOT mean is that you can spend whatever you want on whatever you want.
According to the Federal Reserve Bank of San Francisco, consumers used debit cards for 28% of purchases and payments in 2019. They used credit cards for 23% of payments and cash for 26%.
Paying by check is the way most consumers overdraw their accounts, since debit cards rarely allow for consumers to spend more than what is in their accounts. In 2018, check payments accounted for only 8.3 percent of non-cash payments.
Most banks which charge overdraft fees do not provide a cushion of time for a customer to fulfill their financial obligation. While some banks give a customer a 24-hour window to make a deposit to cover an overdraft without penalty, most do not.
The Ancient History of Overdrafts (Like, 18 Months Ago)
Prior to the pandemic, and for almost as long as banks have existed, banks have found a way to charge customers for trying to spend more than they had in their accounts.
Either they charged a fee for the overdraft (and in some cases, the fees were in the $25-$30 range per overdraft), or they charged customers for “overdraft protection,” which provided financial coverage on overdrafts, although the customer still had to come up with the money they spent over their account balance. Overdraft protection fees average between $30 and $35 per month.
Fees on the Financially Vulnerable
The major problem with overdraft fees or overdraft protection is that they are most needed by those people who could least afford them: people with low checking account balances, or those living paycheck to paycheck.
The Consumer Financial Protection Bureau estimates that 30% of bank customers overdraw their bank accounts annually. The 2021 FinHealth Spend Report stated that 95% of consumers who paid overdraft fees were considered “financially vulnerable’’ and a disproportionate percentage of those consumers were either Black or Latinx.
The Recent History of Overdrafts (Since the Pandemic Hit)
In the digital age, consumers can “bank’’ without the concern of overdraft and non-sufficient fund fees, but only if they do so without using paper checks. Fintech apps such as Aspiration and Chime do not have overdraft fees, but they are also difficult to overdraw on due to the immediate nature of electronic transactions and updating account information.
Similarly, Discover Financial does not charge for overdrafts, but Discover Financial and fintech apps are not legally “banks.”
Banks must be officially chartered with the federal government, which Ally is. Banks provide checking and savings accounts services and are allowed to make a profit, which is where overdraft protections and fees come in.
Kent McDill is a veteran journalist who has specialized in personal finance topics since 2013. He is a contributor to Codetic.