This week, only online banking institution Ally Bank announced that it will no longer charge its customers overdraft fees.
This is good news for their current or potential customers, who are worried about returning checks or charging debit cards for fees they don’t have enough money.
Of course, we should never do this, but it happens sometimes, and historically, when this happens, banks make a lot of money from fines.
Ally’s cancellation of overdraft fees is an influential news for the entire banking industry, which has reduced the costs of overdrafts and insufficient funds by billions of dollars. Ally’s move may force other banks, including long-established companies, to follow suit.
What overdraft fees mean to the banking industry
In early 2020, when the coronavirus pandemic struck, millions of people lost their jobs, and millions of people lost their working hours. While the federal government is launching its financial assistance program, banks are encouraged to temporarily cancel overdraft and insufficient funds.
Many (but not all) banks and lenders have complied with the regulations. Bank of America, JP Morgan Chase and Wells Fargo have all reported that overdraft fee income will exceed $1 billion in 2020. U.S. prospects.
Even in banks and credit companies that do waive overdraft fees in 2020, these measures have always been considered temporary. Until June 3, 2021, Ally Bank announced that it will permanently terminate overdraft and insufficient funds fees.
Most banks charge a fine of $25 to $35 per transaction, so a consumer who needs overdraft protection on a busy but bad day, say, five times. You can see how these costs add up. Before the pandemic, Ally calculated fines per day ($25), not per transaction.
What does no overdraft fee mean to you
“No overdraft fees” This means that consumers will not be penalized for overdraft accounts.
This does not mean that you can spend as much money as you want.
according to Federal Reserve Bank of San FranciscoIn 2019, the proportion of consumers using debit cards for shopping and payment was 28%. The percentage of them using credit cards for payment is 23%, and the percentage of using cash is 26%.
Check payment This is the way most consumers overdraft their accounts, because debit cards rarely allow consumers to spend more than the amount in their account. In 2018, cheque payments accounted for only 8.3% of non-cash payments.
Most banks that charge overdraft fees do not provide a time buffer for customers to fulfill their financial obligations. Although some banks provide customers with a 24-hour deposit window to pay overdrafts without penalty, most banks do not.
Ancient history of overdraft (for example, 18 months ago)
Before the pandemic, almost as long as banks existed, banks had found a way to charge customers who tried to spend more than their account balances.
They either charge a fee for overdraft (in some cases, the cost of each overdraft is between US$25 and US$30), or they charge customers “overdraft protection”, which provides financial protection for overdrafts, even though customers still have to pay The money they spend on the account balance. The average overdraft protection fee is between US$30 and US$35 per month.
Expenses for financially disadvantaged groups
The main problem with overdraft fees or overdraft protection is that those who can’t afford them need them most: people with low checking account balances, or people who live on a salary.
The Consumer Financial Protection Bureau estimates that 30% of bank customers Overdraft their bank account every year.This FinHealth Expenditure Report 2021 Ninety-five percent of consumers who said they paid overdrafts were considered “economically vulnerable,” and a high percentage of these consumers were black or Latino.
Recent history of overdraft (since the pandemic)
In the digital age, consumers can “bank” without worrying about overdrafts and insufficient funds, but only if they don’t use paper checks.Fintech applications such as desire with chimes There are no overdraft fees, but due to the immediacy of electronic transactions and updating account information, they are also difficult to overdraft.
Similarly, Discover Financial does not charge overdraft fees, but Discover Financial and fintech applications are not legally “banks.”
Banks must be officially licensed by the federal government, and Ally is like that. Banks provide checking and savings account services and are allowed to make profits. This is the source of overdraft protection and fees.
Kent McDill is a senior reporter who has been focusing on personal finance topics since 2013. He is a writer for The Penny Hoarder.