This week, online banking institution Ally Bank announced that it will no longer charge overdraft fees to its customers.
This is good news for their existing or potential customers who worry about a bounce check or 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 does and historically, when it does, the bank makes a lot of money in penalty fees.
Ally reducing overdraft fees is moving news for the banking industry as a whole, making billions in overdrafts and insufficient funds fees. The ally’s move may pressure other banks, including long-established firms, to follow suit.
What does overdraft fee mean for the banking industry
In early 2020, when the coronavirus pandemic hit, millions of people lost their jobs, and millions more had their hours reduced. While the federal government launched financial aid programs, banks were temporarily encouraged to eliminate overdrafts and insufficient funds charges.
Many banks and lenders complied, but not all. Bank of America, JP Morgan Chase, and Wells Fargo all reported over $1 billion in overdraft fee income in 2020, according to American expectations.
Even among those banks and credit companies that waived overdraft fees in 2020, these moves were always considered temporary, until June 3, 2021, when Ally Bank announced that it would permanently end insufficient overdraft fees for funds.
Most banks charge a fine of $25-$35 per transaction, so a consumer who has had a busy but shoddy day and needs overdraft protection is, say, five times. You can see how these fees add up. Before the pandemic, Ally assessed the penalty by the day ($25) rather than the transaction.
What an Overdraft Fee Doesn’t Mean to You
There are no overdraft fees It means that consumers will not be penalized for overdrafting their accounts.
What it doesn’t mean is that you can spend as much as you want on whatever you want.
according to Federal Reserve Bank of San FranciscoConsumers used debit cards in 28% of purchases and payments in 2019. They used credit cards in 23% of payments and cash for 26%.
Pay by check This is how most consumers check out their accounts, since debit cards rarely allow consumers to spend more than what is on their account. In 2018, check payments made up only 8.3% of cashless payments.
Most of the banks that charge overdraft fees do not provide a period of time for the customer to meet his financial obligations. While some banks give the customer a 24-hour window to make a deposit to cover the overdraft without penalty, most banks do not.
Old history of overdrafts (18 months ago)
Before the pandemic, and for nearly as long as banks existed, banks found a way to charge customers for trying to spend more than they had in their accounts.
Either they charged an overdraft fee (and in some cases, the fee was in the range of $25 to $30 per overdraft), or they charged customers for “overdraft protection,” which provided financial coverage for overdrafts, although That the customer still has to checkout with the money they spent on their account balance. The average overdraft protection fee is between $30 and $35 per month.
Fees for the financially vulnerable
The main problem with overdraft fees or overdraft protection is that they are most needed by those people least able to afford them: people with low current account balances, or those who live off paycheck to paycheck.
The Consumer Financial Protection Bureau estimates that 30% of bank customers Withdraw their bank accounts annually. The 2021 Financial Health Expenditure Report He stated that 95% of consumers who have paid the overdraft fee are considered “financially vulnerable” and a disproportionate proportion of these consumers are either black or Latino.
Recent history of overdrafts (since the outbreak of the pandemic)
In the digital age, consumers can “bank” without worrying about overdrafts and insufficient financing charges, but only if they do so without using paper checks. Fintech applications such as Ambition And the chime It does not have an overdraft fee, but it is also difficult to withdraw due to the instant nature of electronic transactions and updating account information.
Similarly, Discover Financial does not charge fees for overdrafts, but Discover Financial and fintech applications are not legally “banks”.
Banks must be formally chartered with the federal government, which is the Ally Corporation. Banks offer checking and savings accounts services and are allowed to make profits, which is where overdraft protection and fees come in.
Kent MacDill is a veteran journalist who has specialized in personal finance topics since 2013. He is a contributor to The Penny Hoarder.