January 2022 has turned into a breakthrough month to strengthen consumer protections in the nation’s banking sector and ensure that more Americans can have access to safe and affordable credit. In just nine days, five of the country’s largest banks…Bank of America, Wells Fargo, American bank, Truistand Bank of Regions– announced that they are eliminating the so-called insufficient funds (NSF) fee and certain overdraft fees while adding certain guarantees to their overdraft programs.
Historically, overdraft programs have been marketed as helping people who live paycheck to paycheck to prevent large transactions from being declined, but this high-cost option does not effectively meet the needs of most consumers. who need time to repay in installments. This is especially true for the millions of people who turn to overdraft to borrow small amounts of money.
Encouragingly, American bank and Bank of America already offer small, affordable loans, and the other three banks have announced plans to launch such programs with limits of $500, $750 or $1,000, depending on the bank. The total savings to consumers from overdraft changes at these five banks alone could exceed $2 billion per year. And borrowers’ annual savings from accessing small, affordable loans — compared to the payday loans and other high-cost loans they often use today — could exceed that amount.
Overdraft reform and new small-payment bank loans and lines of credit were needed. The banks’ actions come after Ally Bank and Capital One eliminated overdraft fees altogether in 2021. Pew’s research detailed the harmful effects of overdraft fees and insufficient funds, which have an outsized impact on black customers and low- and middle-income Hispanics.
According to Pew, a third of overdrafts said they had used the borrowing option, essentially as a high-cost form of credit. Research also shows that a small proportion (18%) of account holders pay the vast majority (91%) of overdraft fees. The double step of eliminating major penalty fees and expanding access to small loans will protect consumers and improve their ability to borrow. Three major banks that had already launched small loan programs in recent years – Huntington Bank, Bank of America and US Bank – all reported success. Each gives customers three months to repay, proving that small bank loans can work for consumers and financial institutions.
The actions taken by these five banks could spur other major banks, community banks and credit unions to review their overdraft policies and reduce or eliminate fees. Other banks should follow the example of these five and Huntington to offer small installment loans or lines of credit to their checking account customers.
In recent months, the Federal Office of the Comptroller of the Currency (OCC), under Acting Comptroller Michael Hsu, and the Consumer Financial Protection Bureau, under Director Rohit Chopra, have each implemented evidence of harmful overdraft practices. Agencies have raised concerns that the fee does not spur competition or financial inclusion and makes it harder for struggling consumers to make ends meet.
Recent actions by banks on overdrafts and small loans better align their interests with the financial needs of their consumers. Still, federal overdraft regulation would be beneficial, particularly because most banks and credit unions have yet to take these steps.
Moving away from overdrafting, especially if it extends to more banks, is likely to have important co-benefits. The Federal Deposit Insurance Corporation (FDIC) found that about half of unbanked households had been banked before; many had left or had their accounts closed due to high or unpredictable fees, such as those for overdrafts.
Eliminating or reducing these fees will likely end up increasing the share of Americans who are banked. And increasing the number of Americans who have access to affordable financial services through banks and credit unions is good for the financial health of customers, their communities, and the banking system.
The OCC oversees the safety and soundness of the banks that the agency oversees. Its review of overdraft programs fits perfectly into its mission. Bringing more Americans into the banking system and keeping them there helps on this front because it increases the large potential customer base. Such improvements also strengthen the reputation of banks and show that they are not looking to take advantage of customer difficulties.
Recent changes also emphasize the benefits of long-term mutual success for banks and their customers, rather than efforts to maximize fee income for each bank’s upcoming quarterly earnings report. At a system-wide level, overdraft fees reduce, rather than increase, the safety and soundness of all banks.
The Federal Reserve Board and the FDIC would do well to follow the lead of the OCC and review the overdraft practices of the banks they supervise. Concerns about providing liquidity to consumers should be met by real small credit, rather than overdraft policies that carry penalties. January’s developments prove that this scenario is becoming an industry standard. This is good news that is likely worth billions of dollars in savings for households living paycheck to paycheck.
Major overdraft policy changes at 5 of the 7 largest US banks
January updates will benefit low- and middle-income households
|Bank||Overdraft Policy Changes||Small loan offer|
|Bank of America||Will eliminate NSF and overdraft transfer fees and ATM overdraft and reduce overdraft fees from $35 to $10.||Yes: installment loan up to $500|
|Regions||Eliminate NSF and overdraft fees. Will allow access to direct deposit two days before payday. Will also limit the number of overdraft fees to three per day.||Pending: $500 line of credit, details to come|
|Truist||Eliminate NSF and overdraft fees, while adding checking account functionality with a negative $100 balance buffer and no-overdraft checking accounts.||Pending: $750 line of credit, details to come|
|American bank||NSF fees eliminated. Waive overdraft fees on negative balances up to $50 and provide a full day grace period for overdraft fees.||Yes: installment loan up to $1,000|
|Wells Fargo||Eliminate NSF and overdraft fees, begin a 24-hour grace period for overdraft fees, and allow access to direct deposit two days before payday.||Pending: $500 loan, details to come|
Source: All details from company announcements.
Alex Horowitz is a Principal Officer and Linlin Liang is a Senior Associate of The Pew Charitable Trusts Consumer Lending Project.