The long farewell to overdraft fees continues

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As many as one in four US households are unbanked, with high bank fees among the reasons consumers cite for not signing up for financial services with a bank. Alternatives, such as check cashing services, are also expensive, but either way, overdraft fees can be devastating for families living paycheck to paycheck. With average overdraft fees approaching $35 per person, these fees often come at the worst times for people – as the global pandemic has proven. Today, Citi, the fourth largest bank in the United States, has pledged to end this practice.

By this summer, Citi says it will eliminate overdraft fees, returned item fees and similar fees in a bid to expand “financial inclusion.” The company claimed that it had already minimized overdraft fees over the past 20 years. Still, with this news, Citi stands out as America’s first “mega bank” to end what critics have long called a “predatory” banking practice that hurts the poorest citizens the most. Banks may quibble over whether overdraft fees are a significant source of revenue for them or not, but the truth is that the billions in revenue these fees generate are largely on the backs of the working poor.

Of course, the ever-changing banking market has something to do with this change. Banks today have plenty of competition, including credit unions and online banking, many of which have minimal or no fees: Aspiration and Greenwood are among those options.

According to data from the Consumer Financial Protection Bureau (CFPB), Citi generated $70 million in overdraft and similar charges for the first nine months of 2021. That may seem like a lot, but it certainly pales in comparison to its competitors, several of which have reaped such revenues that amounted to hundreds of millions of dollars – with one bank hitting the billion dollar mark.

Citi’s announcement follows the lead of other banks that have taken similar action. Capital One, for example, said last December that it would remove these fees and provide free overdraft protection. Last month, Bank of America announced plans to cut its overdraft fees, which would reduce that revenue to 97% from 2009 levels. During the pandemic, Ally stopped charging overdraft fees at the peak of the pandemic, then said last year that it would eliminate them permanently.

Image credit: Joshua Lawrence via Unsplash

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