The squabble over billions of dollars in overdraft fees that Americans get charged every year is intensifying.
The Consumer Financial Protection Bureau is expected to propose rules this week that further rein in banks’ ability to charge customers a fee when they overdraw their bank account. Opponents of the fees often cite the example of a $3 cup of coffee costing someone $40.
The banking industry is gearing up to fight back with a multimillion-dollar marketing and lobbying campaign. While banks have drastically cut back on overdraft fees in the past decade, the nation’s biggest financial institutions still take in roughly $8 billion in overdraft fees every year, according to data from the CFPB and bank public records.
The Biden administration has placed overdraft fees at the center of a campaign against what it calls “junk fees” and has directed government regulators – the CFPB and the Federal Trade Commission – to do whatever is in their power to further curtail the practice.
“It’s just taking advantage of people,” President Joe Biden said in October.
Banks charge a customer an overdraft fee if their bank account balance falls below zero. Debit cards, which started off as a courtesy offered to some customers, exploded in popularity beginning in the 1990s and in part led to Americans racking up tens of billions of dollars in overdraft fees.
Caving to popular and political pressure, most of the biggest banks have added safeguards to customers’ accounts to allow them to bring the balance back into positive territory before they incur a fee, which at some banks can be as high as $39. Bank of America, once considered by industry critics to be the biggest abuser of overdraft fees, cut its fee from $35 to $10 two years ago and says revenue from overdraft fees is now less than 10% of what it had been.
The largest banks have also curtailed their collection of fees for insufficient funds. In that case, the bank charges a customer a fee for not having the funds to cover a charge but also denies the transaction. These are commonly known as “bounced check fees.”
According to Bankrate research conducted in August 2023, overdraft fees are still charged on 91% of accounts surveyed – and they can run as high as $39. The average overdraft fee in 2023 was $26.61.
Banking industry sources and consumer advocates both expect the CPFB’s regulations to be focused on when overdrafts can be charged on a customer’s account and how much banks can charge relative to the amount of risk a bank is taking on to cover a routine purchase. One criticism of overdraft fee practices is that the cost to a bank to cover routine purchases is low and they have safeguards in place to stop customers from taking their accounts deep into the red.
A report put out last month by the CFPB found that a quarter of households making less than $65,000 frequently get hit with overdraft fees, and that Black and Latino households are more likely to overdraft, meaning that the families least able to afford the fees are often the ones incurring the fees more frequently.
“That is increasingly difficult for banks to justify. Particularly at the level of fees that are being charged,” said Greg McBride, an analyst with Bankrate.
While big banks have cut back on overdraft fees, smaller banks have not, and a number of them heavily rely on overdrafts to be profitable, industry analysts said.
“There are still a large number of small banks and many credit unions that have not changed their credit policies, including a handful who have become addicted to overdraft,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution. “When you see an entity like Armed Forces Bank make all of their revenue off overdraft, off members who are enlisted military personnel overseas, you either want to scream or cry.”
Rohit Chopra, CFPB director, has been a fierce critic of overdraft fees, both in his current position and previously when he was at the Federal Trade Commission. The bureau has put out several reports in recent months highlighting bad industry practices regarding overdrafts, clearly signaling that it’s ready for a fight.
“[The bureau] has been focused on creating more competition, which is helping to eliminate junk fees and stop financial firms from cooking up new junk fees,” Chopra told journalists in October in prepared remarks.
The industry is unlikely to convince Chopra to hold off on the overdraft rules, and instead hopes to delay the bureau long enough to have any regulation overturned by a Republican Congress and president after the 2024 election using the Congressional Review Act.
The law was used in the early months of the Trump administration to overturn several policy wins of President Barack Obama late in his term, most notably regulations on high-cost payday loans.
“We urge you not to proceed with these rulemakings until the Bureau assesses the economic impact of its rulemakings on community banks and credit unions, as the Bureau is required to do so,” the American Bankers Association and other bank lobby groups wrote in a joint letter to the CFPB this month.
The banking lobby is also trying to be as vocal in their opposition as possible to prepare for an almost certain legal challenge to whatever rules the CFPB decides to implement. Any legal battle would have a high chance of ending up in front of the Supreme Court.
“The CFPB has done its homework here,” said Carter Dougherty, a spokesperson for the left-leaning Americans for Financial Reform. “Some banks have gotten rid of overdrafts entirely and the world is still spinning on its axis. If bankers can’t run a business without relying on gotcha fees, they should find a new line of work.”