Why Bank of America’s $10 overdraft fee could catch on

Bank of America’s decision to slash its overdraft fee from $35 to $10 is likely to have ripple effects across the industry, analysts said, pressuring other banks to follow suit.

On its face, the megabank’s announcement Tuesday appeared less aggressive than the complete elimination of overdraft fees, a step that both Capital One Financial and Ally Financial have taken in the last seven months.

But Bank of America’s sheer size — its $3 trillion in assets make it the second biggest bank in the country — could push other banks to reduce what they charge customers who spend more than they have in their accounts, according to analysts.

Bloomberg

Banks generally charge customers $30 or $35 to overdraw an account, but Bank of America’s action will likely be a “bellwether move for the industry,” said Leo D’Acierno, senior advisor at the consulting firm Simon-Kucher. “Everybody else has to answer the question now: Why can't you match that or get close to it?”

Banks collected some $15.5 billion in overdraft-related revenue in 2019, the Consumer Financial Protection Bureau estimated in a report last month. That number fell by 26% in 2020 as some banks waived overdraft fees during the early stages of the pandemic and checking account balances swelled from government stimulus payments.

Over the past year, several banks have announced moves that will reduce the amount of revenue they collect when customers overdraw their accounts. While Capital One and Ally have scrapped the fees altogether, other institutions have launched tools that can help their customers avoid the charges.

The latest bank to do so is Wells Fargo, which said late Tuesday that it will introduce a new 24-hour overdraft grace period, a $500 short-term loan that will offer an alternative to overdrafts and allow customers to access direct deposits up to two days early.

The actions by BofA, Wells Fargo and others come as the Consumer Financial Protection Bureau pressures banks to make changes, overdraft-free startups offer alternatives to fee-laden checking accounts and consumer advocates continue to criticize the bank fees.

Bank of America’s moves are part of a “journey we’ve been on for over a decade” to reduce overdrafts for customers, Holly O’Neill, president of retail banking at the Charlotte, North Carolina, bank, said in an interview.

Combined with other steps BofA has taken over the years, the bank said the changes will reduce its overdraft fee revenue by 97% from their 2009 level.

In addition to cutting its overdraft fees to $10, Bank of America plans to eliminate customers’ ability to overdraw their accounts with ATM transactions, scrap $12 transfer fees for a program that lets customers link other accounts to avoid overdrafts and eliminate nonsufficient funds fees. The latter fees occur when customers try to make purchases that get rejected because their accounts do not have enough money.

Wells Fargo also plans to scrap both nonsufficient fund fees and charges for an overdraft transfer program similar to BofA’s.

Asked whether it will join Bank of America in slashing the price of an overdraft, Wells Fargo Head of Deposits Ed Kadletz said the $1.9 trillion-asset bank is “excited about the options” it is giving its customers to avoid overdrafts.

“It really puts this in the customers’ hands and gives them choices, which is what we're really trying to accomplish,” Kadletz said in an interview. “Overdraft does have a place, and there are customers that value that and utilize that.”

BofA’s O’Neill made a similar point, saying the bank’s conversations with customers and community groups indicated that “clients wanted access to occasional overdrafts.” The bank settled on $10 as the right price after analyzing data on customer overdrafts and potential losses to the bank, and having conversations with consumer advocates, O’Neill said.

O’Neill said the bank’s new policies are intended to strike the balance between “promoting the right financial behavior” — by not encouraging continual overdrafts — while lowering the cost of accessing short-term liquidity.

Similar announcements from other banks may be on the way, said Greg McBride, chief financial analyst at Bankrate.com.

Banks that continue charging $30 or $35, particularly larger institutions, will struggle to explain to regulators and lawmakers why they are sticking with that price when one of their biggest competitors charges $10, he said.

Still, some banks may be reluctant to make any changes before they figure out how to compensate for the lost revenue, he noted.

“I think it's safe to say that this is a watershed moment in terms of overdraft fees,” McBride said.

The Center for Responsible Lending, which has been critical of bank overdraft fees, praised Bank of America’s new suite of overdraft-related policies.

“It sets a gold standard for overdraft reform, and the CFPB should promptly adopt rules that provide these protections to all bank customers,” Mike Calhoun, the group’s president, said in an emailed statement.

Large and midsize banks have been taking action on overdraft fees as the Biden administration sharpens its tone on the topic. Acting Comptroller of the Currency Michael Hsu recently highlighted steps that some banks are taking, holding them up as an example for others in the industry.

And last month, CFPB Director Rohit Chopra pledged to crack down on big banks that are reliant on the charges, calling out Bank of America, JPMorgan Chase and Wells Fargo for collecting a major chunk of the overdraft fees charged by the industry.

The CFPB is likely to take action on the issue this year, but the process “could take many months,” Ian Katz, a policy analyst at Capital Alpha Partners, wrote in a recent note to clients. Possible changes include limiting the number of times a day that banks can charge overdraft fees and restricting charges when customers have pending deposits, he wrote.