Overdraft fees are predatory bullshit — a tool that banks use to run up a profit, capitalizing off their customers when they are at their most vulnerable. Ally Bank, one of the largest banks in the country, rightly recognized the burden that these unnecessary fees put on its customers last year and suspended the charges during the coronavirus pandemic. Now it is officially doing away with the fees for good. On Thursday, the company announced that it is killing off overdraft charges for all customers, citing the burden that these fees place on vulnerable populations.
Currently, there is no federally enforced limit on how much banks can charge for an overdraft. The average is about $34, and these things can compound quickly. Each time a person who is overdrawn tries to complete another transaction, they can be hit with another fee. Some banks place a cap on how many times they will charge a person in a single day, but that can still result in racking up a tab of more than $200 — with additional fees to follow if the person is unable to get their account back to $0 within just a few days.
Here's one way to think of overdraft charges, as highlighted in a report conducted by the Consumer Financial Protection Bureau. In studying consumer habits, the agency found that the average overdraft fee is incurred on transactions of $24 or less, which is usually repaid within three days. Banks charge a median overdraft fee of $34. If you think of that charge as a loan, it would carry an annual percentage rate (APR) of 17,000 percent. Payday loans, widely recognized as predatory and unethical, typically carry an APR of around 600 percent.
These charges are a huge source of profit for banks. According to the 2021 FinHealth Spend Report, consumers paid $12.4 billion in overdraft fees in 2020. JPMorgan Chase netted $1.5 billion in revenue from overdraft fees alone in 2020, according to The American Prospect. Wells Fargo made $1.3 billion and Bank of America made $1.1 billion off these same fees — all while a global pandemic left more than 20 million Americans without a job and millions more with reduced work and income. These fees were collected despite guidance published by the Federal Reserve calling on banks to waive them during the pandemic.
Those charges were in large part paid by people who likely couldn't spare the unnecessary expense. According to the FinHealth report, 95 percent of consumers who paid overdraft fees in 2020 were considered "financially vulnerable," with 80 percent living paycheck to paycheck. The report also found that financially vulnerable households experienced an average of 9.6 overdrafts over the course of 2020. The people getting hit with these fees are disproportionately Black and Latinx.
The sole purpose of overdraft fees is to provide financial institutions with a reliable way to monetize their most vulnerable customers. Good riddance to Ally Bank's overdraft fees. Let's hope other banks join in, though given how much they pad their bottom line with this practice, it's probably best not to hold your breath.