In June 2021, Ally Bank announced the elimination of all overdraft fees for every customer. Overdraft fees have long been a pain point for consumers, and it’s time to end them.
Overdraft fees have been around in one form or another for hundreds of years. They were created to help banks offset the operational costs related to handling overdrafts, as well as to motivate customers to use checking products appropriately. The reality today is that overdraft fees generate more than $12 billion annually, and most are paid by consumers living paycheck to paycheck or with consistently low balances — precisely the people who can least afford them.
In 2020, 95% of consumers who paid overdraft fees were financially vulnerable or coping, and disproportionately Black and Latinx — the same people being hit hardest by the COVID-19 pandemic. In addition, 43% of financially vulnerable households averaged 9.6 overdrafts in 2020, resulting in hundreds of dollars per household in overdraft fees.
When we designed Ally in 2009, we said the world didn’t need another bank, it needed a better bank. Since then, we’ve been relentlessly obsessing over our customers, putting them at the center of everything we do. Similarly, in the past decade, we’ve seen many banks lean into the customer experience in a truly meaningful way, and we’re excited by the industry’s customer-centric momentum.
Money can be a source of stress and confusion. The onset of the pandemic is precisely the kind of circumstance where customers need their banks to help them, and it spurred us to try even harder to reduce our customers’ pain points as much as possible.
We recognized that consumers were facing extraordinary pressure, and there had never been a more critical time to deliver on our promise to “Do It Right.” We wanted to do our part to help reduce that anxiety and provide customers access and flexibility with their money at the time when they needed it most. So as part of our COVID Relief Package, we proactively waived all overdraft fees, while still allowing customers the ability to overdraft. It was simply the right thing to do.
What we saw was an overwhelmingly positive response from our customers. Not only did the fee waivers safeguard customers against additional financial trouble, but we also saw no change to customer behavior or usage. Analyzing this data ultimately was the catalyst for Ally to permanently eliminate overdraft fees. Simply put, eliminating overdraft fees made a real difference to our customers and we found that we could afford to absorb the costs associated with processing the overdrafts without substantially affecting our bottom line.
After we announced that we would be eliminating overdraft fees, many banks asked questions as they considered evaluating their own policies. The biggest concern was how or whether Ally could make up for the loss of overdraft revenue. The answer for us was simple — we’re not making up for that revenue elsewhere. As it was, overdraft fee income was de minimis to Ally’s overall revenue profile, so there wasn’t that much to forgo. But it means a lot to our most vulnerable customers, and we think that what is good for our customers is going to be good for our business.
Another reasonable question is whether eliminating overdraft fees might ultimately harm consumers due to other restrictions or penalties. Again, the answer for us was no; we did not change anything else in the overdraft experience. We still complete many transactions that overdraft our customers’ balances, but we simply don’t charge an additional fee for doing so — we assume that risk. For us, it was critically important to anchor our decisions in what is right for the customer, and that meant continuing to ensure customers have the same ability to complete a transaction with overdraft — but now at no cost to them.
Allowing reasonable overdraft access provides customers with peace of mind while also safeguarding them against other potential consequences such as merchant fees, late fees, account cancellations and embarrassing situations. The potential risk of consumer harm comes into play when institutions unreasonably revoke a customer’s ability to overdraft.
Looking forward, we know it’s not just about the fee; it’s about the end-to-end experience. Customers crave more transparency and support from their banks on how to utilize their account responsibly. At Ally, what we have found is that we have an incredible opportunity to reform these long-held overdraft practices in a way that better meets the needs of today’s consumers. What’s good for the customer is good for the industry, and more and more banks are coming to the same conclusion. Hopefully the renewed focus on the customer experience will lead to more consumer-focused innovations down the road.
Diane Morais ranks as one of American Banker's
