Americans whose income took a hit from the coronavirus pandemic have paid more in overdraft fees than those who weren’t financially hurt by COVID-19. People of color, for instance, are paying more than twice the amount in banking fees than white Americans, according to a recent Bankrate survey.
But some banks, like Detroit-based Ally Bank, the largest U.S. digital bank, have cited the impact that overdraft fees have on Black and Latino households, which are historically poorer than their white counterparts and are hit with these fees more often. Overdraft fees are what a bank charges any time a customer withdraws more money from their account than they hold in it.
It’s also a common reason why Black and Latino households choose to be “unbanked,” or living without a bank account in order to avoid the fees that often come with them.
Last week, Ally Financial said it will eliminate overdraft fees for all of its banking products, making it the first major bank to end these fees across its entire business. The main reason for the fee elimination was how onerous it was to low-income people, Ally said.
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“Nationwide, more than 80% of overdraft fees are paid by consumers living paycheck to paycheck or with consistently low balances – precisely the people who need help stabilizing their finances. Eliminating these fees helps keep people from falling further behind and feeling penalized as they catch up,” Jeffrey Brown, CEO of Ally Financial, said in a statement.
Ally didn’t earn significant fees from overdrafts compared with other banks. The most Ally charged each customer for overdrawing an account was $25 per day, instead of per transaction. Ally doesn’t expect that ending overdraft fees will have a major impact on the company’s full-year profit forecasts.
“This will definitely appeal to younger and lower-income households who are most prone to overdrafts, for whom this is a significant issue,” says Greg McBride, chief financial analyst for Bankrate.com. “Some banks are willing to bypass some revenue to establish and build relationships with consumers.”
Overdraft fees can be a significant expense, particularly for low-income households. Those fees cost Americans $12.4 billion in 2020, according to the Financial Health Network, a data analytics company.
Overdraft fees vary from bank to bank, average $33.47, according to Bankrate’s 2020 checking account and ATM fee study.
But don’t expect all banks to walk away from overdraft fees in the near term, McBride said. Those fees remain a big source of income for many banks, he added.
Financial firms brought in an estimated $31.3 billion in consumer overdraft revenue in 2020, according to financial-data firm Moebs Services.
“More online banks are moving in that direction and larger, more traditional brick-and-mortar banks have softened their stance,” toward charging fees, McBride said But, “they won’t eliminate overdraft fees anytime soon.”
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JPMorgan Chase, for instance, collected the most revenue, making almost $1.5 billion from overdraft fees, according to Bloomberg, though the bank said it waived fees for customers affected by COVID-19.
Low-income households feel the pain
Costs associated with overdraft fees have hurt low and moderate-income Americans the most, including Black Americans and Latinos, according to the latest FinHealth Spend Report. Black households with checking accounts are 1.9 times more likely to have overdrafted than white households while Latinos were 1.4 times more likely than white households.
Forty-three percent of “vulnerable households” with checking accounts, or those who struggle to spend, save, borrow and plan, report having overdrawn from their accounts in the past year, with 9.6 overdrafts on average.
“Overdraft fees have become a form of financial quicksand for low-income households that are living paycheck to paycheck,” McBride said.
How to avoid overdraft fees
Overdraft fees can be avoided if you take some precautions.
1. Sign up for overdraft protection
With overdraft protection, the bank will transfer money from one of your other accounts to cover an overdrawn amount.
2. Sign up for bank alerts
Set up an alert to notify you when your account balance falls below a certain amount. This is a simple way to avoid unexpected overdrafts and save fees.
3. Try to get an overdraft fee waived
If you are charged an overdraft fee, that doesn’t always mean you are stuck paying it. It doesn’t hurt to negotiate to try to have the fee reimbursed. Be sure to call. There’s no guarantee it will work, but you can call and ask the bank to remove the charge from your account.
Contributing: The Associated Press