Farewell to bounced-check fees: Big banks overhaul overdraft policies

Two of the “big four banks” — Wells Fargo and Bank of America — announced significant changes that will reduce fees for overdrafting, which is when a customer withdraws or charges more money than they have in their account. Both firms will eliminate all fees for bounced checks, also called “non-sufficient funds charges.” 

In May, Bank of America will also reduce the penalty for overdrafting from $35 down to $10. Plus it will be eliminating the transfer fees for overdraft protection. The fee for bounced checks will end in February. The company explained the full extent of its changes in a Jan. 11 press release.

Wells Fargo joined in the fee-cutting on the same day, announcing it will eliminate its bounced-check charge as well as the fee for overdraft protection, starting in March. The bank will also give customers a 24-hour grace period before imposing an overdraft fee and allow them to access direct-deposit payments two days earlier than before.

Mary Mack, Chief Executive Officer of Wells Fargo Consumer and Small Business Banking, said that the changes “give our customers more choice and flexibility in meeting their needs.”

Here’s what the two banking giants are doing, which institutions are also cutting overdraft penalties, and how you can avoid them in the first place. 

For more, learn about the best checking accounts for 2022, the best debit cards for kids, and what banking institutions are doing to help during the pandemic.

What is an overdraft fee?

An overdraft fee is a financial penalty your bank charges you when you spend more money than you have available in your account.

For example, if you have $50 in your checking account and buy a $100 item, your bank may clear the transaction but charge you an overdraft fee because you were $50 short. It will also take the remaining $50 when you make another deposit.

Overdraft fees are a subset of “non-sufficient fund” (NSF) fees: If your bank returns the presented payment — say, a check — without covering the amount, you’re generally charged an NSF.

How much do overdraft fees cost?

Overdraft fees vary by bank, but typically you’re looking at $30 per overdrawn transaction, according to the Federal Deposit Insurance Corporation. If one overdraft charge causes another transaction to come up short, you can be hit with multiple fees all at once.

And the fee is fixed, whether you were short $1 or $100.

Why are overdraft fees such a big deal?

The nation’s top banks generated some $4 billion from overdraft fees last year, Sen. Elizabeth Warren, a Massachusetts Democrat, said in a Senate Banking Committee hearing in May 2021.

Almost one in 10 Americans overdraw their accounts more than 10 times a year — accounting for approximately 80% of all overdraft and non-sufficient funds fees, according to the Consumer Financial Protection Bureau.

“They most often get charged to low-income customers, so they hit the people who can least afford to be in that situation,” Varun Krishna, senior vice president and head of consumer finance for Mint and Intuit’s Consumer Group, told CNET. “The person who gets hit with an overdraft on a $5 Starbucks latte can’t afford a $30 overdraft fee.”

One overdraft fee can start a cascade effect, throwing a person’s entire account out of whack and causing other payments to be missed. “They think maybe I need a paycheck advance, and that opens up a whole new set of financial problems,” said Krishna.

And the penalties keep rising: In 2000, the average overdraft fee was $23.74, according to a Bankrate study. In 2021, they cost $33.58 on average. 

Have other banks eliminated overdraft fees?

Ally Bank announced in June it was permanently eliminating all overdraft fees after waiving them temporarily amid the COVID-19 pandemic, while PNC rolled out a feature for its online customers in April that helps prevent overdrafts.

In December, Capital One said it was eliminating all overdraft and non-sufficient fund fees in 2022 for its consumer banking customers. (The company already offers free overdraft protection.)
  
The National Consumer Law Center called the move “a landmark moment” that will have “tremendous benefits for the most vulnerable consumers.”

That same month, JP Morgan Chase also eliminated its returned item fee/non-sufficient funds fee and increased its overdraft “cushion” from $5 to $50.

“Overdraft service fees only begin with the transactions that overdraw the account by more than $50 at the end of the business day,” the company said in a release.

Later this year, Chase will begin giving customers 24 hours to bring their balance current to avoid a fee and will enable customers to use their direct-deposited payroll up to two business days early.  

“These changes have already provided the extra support to more than two million customers who have avoided on average $60 in fees waiting for their paycheck to hit or are just a little short in funds that day,” Jennifer Roberts, CEO of Consumer Banking at Chase,” said in the statement.

Discover, Chime, Axos and Aspiration all offer checking accounts with no overdraft fees.

Jennifer Bombardier, director of personal banking public affairs at Citi, told CNET the money Citibank collects from overdraft fees “is among the lowest compared to our peer set.”

According to Bombardier, Citibank declines ATM or point-of-sale debit transactions when the money is not available, and processes checks from the lowest dollar amount to the highest, minimizing the impact of an overdraft. 

Krishna said he suspected there are discussions about cutting overdraft fees at many banks. 

“A lot of customers shift around between the bigger banks, so they try to keep up with their offering,” he said. “But if you want to innovate you need to think a few steps ahead – I think we might see even more changes coming.” 

Be sure to check with your bank about any alterations to their overdraft fee policies.

Why are these banks eliminating fees?

Banks aren’t typically known for doing things out of the kindness of their heart. Krishna says the trend is likely spurred by a variety of motives, including good PR and a desire to avoid government intervention. (In 2021, both the House and Senate proposed bills to limit overdraft fees.)

There are also new products and institutions in the banking world they need to compete with.

“Overdraft fees should have been improved a long time ago,” Krisnha said. “The reason they haven’t is that they’ve been able to make a profit off misfortune. But they have to get off of these predatory practices. You have new players that don’t charge these fees. But it’s like a drug — it’s hard for them.”

How can I avoid overdraft fees if my bank charges them?

Besides moving your money to one of the banks that has eliminated overdraft fees, you can always opt out of them:  According to the CFPB, if you don’t agree to overdraft charges, transactions that exceed your available balance will simply be declined.

It’s not a fool-proof option, though: If you write a check that bounces and is returned by the merchant, your bank or credit union will likely still hit you with a non-sufficient funds fee.

There are other strategies to make an overdraft less likely, such as signing up for low-balance alerts. Mint offers an overdraft early warning system independent of your banking system, Krishna said.  

You can also link your checking account to your savings account – so funds can transition from one to the other if needed – or link your checking account to a line of credit. You may still have to pay a fee and interest — but it’s usually less than an overdraft fee, according to the CFPB.