Citi poised to become largest bank to eliminate overdraft fees

Citigroup is poised to become the largest U.S. bank to eliminate overdraft fees entirely.

The New York megabank said Thursday that it plans to discontinue the controversial fees, along with two related charges, by this summer. Citi currently charges customers $34 when they overdraw their accounts.

The action is part of Citi’s ongoing efforts to “make the financial system easier and more equitable for communities who have little or no financial buffer,” Gonzalo Luchetti, Citi’s CEO of US Personal Banking, said in a press release.

Bloomberg

Citi will join Detroit-based Ally Financial and McLean, Virginia-based Capital One Financial in scrapping overdraft fees altogether.

Over the last year, as the fees have faced closer scrutiny from Biden administration regulators, numerous large and regional banks have announced less drastic actions that will nonetheless reduce their overdraft revenues, often by helping customers avoid the charges more often.

Citi, which has $2.3 trillion of assets, is the nation’s third- largest bank holding company. But it has a far smaller retail footprint in the United States than three other megabanks — JPMorgan Chase, Bank of America and Wells Fargo — and it has long been far less reliant on overdraft fee revenue than its chief competitors.

At Citi, overdraft fee revenue makes up less than 1% of total fee income, according to a recent regulatory filing. That compares with 2.3% at JPMorgan Chase and roughly 5% at both Wells Fargo and Bank of America.

Citi’s announcement is a “win for consumers,” but the bank’s relatively small retail presence makes its policy change less impactful than if another megabank were to scrap overdraft fees, said Greg McBride, chief financial analyst at Bankrate.com.

Still, he noted that Citi is joining a flood of banks that are curtailing their overdraft revenues or eliminating them altogether.

“This is the way the wind is blowing, and particularly with larger banks taking these steps, it will lead to even more banks following down this path,” McBride said.

Last month, Bank of America slashed its overdraft fee from $35 to $10, a move that analysts said could lead other banks to follow suit. In the weeks after BofA’s announcement, First Citizens Bancshares in Raleigh, North Carolina, cut its overdraft fee from $35 to $10, and Buffalo, New York-based M&T Bank reduced its overdraft fee from $36 to $15.

Among the other U.S. megabanks, JPMorgan Chase has raised the cushion below which customers can avoid an overdraft fee from $5 to $50. It has also said that it will give customers a day to make up for any overdrafts beyond $50 and announced plans to allow customers to access direct deposit funds up to two days early.

Wells Fargo is adding a 24-hour overdraft grace period and rolling out a new short-term credit product that will let customers borrow up to $500 for a fee. Wells is also eliminating fees charged when customers with a negative account balance try to make a purchase that gets denied, as well as fees for transferring money from a linked account in an effort to avoid overdraft fees.

Consumer Financial Protection Bureau Director Rohit Chopra, who has led the Biden-era charge against overdraft fees, has specifically targeted the overdraft practices at the nation’s largest banks.

“Many American families pay large banks large fees for the privilege of holding their money,” Chopra told reporters in December. “Big banks’ overdraft fees are still the steady, reliable, predictable, easy revenue that their shareholders love. The market will not solve this on its own.”

Earlier this month, Chopra acknowledged that many banks are changing their overdraft practices. “I think a lot of institutions realize that for the long term they need to transition away from being dependent on these fees,” he said at a Feb. 10 event.

The Consumer Bankers Association, which has pushed back against Chopra’s criticisms, said in a statement Thursday that Citi’s announcement is another example of banks’ “commitment to meet evolving consumer demands.”

“CBA long has urged policymakers to recognize these bank-led innovations, which have occurred without regulatory intervention, and collectively represent a transformational shift across the industry,” said Richard Hunt, the trade group’s president and CEO.

In its announcement Thursday, Citi said it plans to eliminate returned item fees, which customers can incur when they bounce a check. Citi also plans to scrap a $10 overdraft protection fee that it charges when customers transfer money from a Citi savings account to cover a purchase.

In addition, the bank said it will eliminate fees for accessing a line of credit that allows customers to avoid overdrafts. The line of credit carries a variable annual percentage rate of between 15.25% and 18.25%.