Under increasing pressure from consumer advocates and legislators, a number of banks are beginning to reduce overdraft fees, a long-standing profit center built around customers struggling to make ends meet.
Chicago-based Alliant Credit Union took it one step further Monday, eliminating overdraft fees on all of its accounts.
“There is this category of fees that’s among the most disliked in all of financial services,” said Dennis Devine, president and CEO of Alliant Credit Union. “So we simply eliminated it.”
A major revenue stream for financial institutions, and a painful penalty for customers, banks often charge an overdraft or non-sufficient funds fee when an account falls below the balance needed to cover a transaction. The average overdraft fee is $30 per transaction, according to Mike Moebs, a Lake Forest, Ill.-based economist who conducts research for the banking industry.
Last year, overdraft and NSF fees generated $31.3 billion in revenue for financial institutions, down nearly 10% from $34.6 billion in 2019, Moebs said. Once an insignificant part of banking revenue, overdraft fees peaked at $37.1 billion in 2009, before new regulations slowed their growth by requiring opt-in consent from customers, Moebs said.
“Prior to ‘79, these fees were not that important to depositories,” Moebs said. “They are now extremely important. If it weren’t for the fee income, 94% of the depositories in the United States would not have net income.”
The burden falls mostly on customers who can least afford it. A 2017 report by the Consumer Financial Protection Bureau found frequent overdrafters had 9% of the bank accounts but paid 79% of all overdraft and NSF fees. The majority of overdrafters were in some degree of financial distress, according to the report.
A number of banks have taken steps recently to reduce or eliminate overdraft fees, at least on certain types of accounts, as the economic pressure wrought by the COVID-19 pandemic casts a harsher spotlight on the practice.
The issue came to a head in May, when Sen. Elizabeth Warren of Massachusetts took JPMorgan Chase CEO Jamie Dimon to task at a banking hearing for charging customers $1.46 billion in overdraft fees during 2020.
In June, Ally Bank, the largest digital bank in the U.S., eliminated all overdraft fees, citing the disproportionate burden on the financially vulnerable and people of color. Ally customers previously faced a $25 penalty on overdrawn accounts.
Founded in 1935 by a group of United Airlines employees, Chicago-based Alliant has grown into one of the largest credit unions in the nation with 600,000 members nationwide and more than $14 billion in assets. The credit union shifted to a digital-only platform last year, after closing the majority of its branches in 2018.
Alliant previously charged overdraft fees that ranged from $25 to $28 per transaction.
Devine, who took the helm at Alliant in July 2020 after seven years as president of consumer banking at KeyBank in Cleveland, said the credit union has “never relied” on overdraft fees. The efficiency of its digital-only platform enables Alliant to shut off the overdraft revenue stream completely, he said.
“Of course there is a revenue impact when you take any fee to zero,” Devine said. “But it’s always been a smaller part of our business.”
Access to federal pandemic relief funds proved more challenging for the unbanked and underbanked, many of whom had no place to deposit the new monthly child tax credit payments the government began issuing in July. Having a low-cost bank or credit union account may help solve that problem
Consumer advocates have been pushing hard for banks to reduce or eliminate overdraft fees since the Great Recession. In 2015, the nonprofit Cities for Financial Empowerment Fund launched the Bank On initiative for financial institutions to certify accounts with low minimum opening deposits and reduced costs, including no overdraft fees.
Nationally, there are 113 financial institutions that meet the Bank On standards, including 20 in Illinois. Chicago-based BMO Harris is among the most recent, with its Smart Money account achieving certification in June.
David Rothstein, a senior principal at the CFE Fund who heads up the Bank On program, said checking accounts without overdraft fees are crucial for both the unbanked and underbanked populations, but also help banks develop long-term relationships with younger customers.
“Most people who are paying a lot in overdraft fees are going to cycle out of that account,” Rothstein said. “I think financial institutions are hoping to turn that tide and have a longer relationship with their clients.”
Devine said over the past decade, banks have charged more in fees to customers than they have paid in interest on savings. The advent of “niche accounts” at some banks that offer lower costs and no overdraft fees is a step in the right direction.
But he is challenging other financial institutions to follow Alliant’s lead and do away with overdraft fees entirely.
“It’s a category that is ripe for disruption,” Devine said. “There are better ways to serve our members than fees like that.”