Banks, credit unions making changes on how sky-high overdraft fees are handled | Business

Overdraft fees remain a moneymaking machine for banks and a devastating financial gotcha for poor families and communities of color.

Some consumers lose enough money in just one day to cover a monthly utility bill. Think about that one for one minute.

Many vulnerable consumers just don’t have a financial cushion to absorb those kind of losses. At the extreme, some end up seeing their checking accounts closed after accumulating overdraft fees and dealing with ongoing negative balances.

Many well-off consumers who can pay few fees — or even get a fee waived — don’t get too excited about the overdraft debate. Some judge others, maintaining that people should learn how to balance their checkbooks.

But overdraft fees are generating sizzle this summer as the political pressure heats up.

During the coronavirus crisis, many struggling consumers felt that banks could have offered them more financial support but didn’t, said Peter Smith, senior researcher at the Center for Responsible Lending.

“People across the country have gotten tired of overdrafts,” Smith said. “It feels increasingly punitive.”

The Rolling Stone weighed in last month after U.S. Sen. Elizabeth Warren slammed Jamie Dimon, the chairman and CEO of JPMorgan Chase, over how the major New York-based bank generated nearly $1.5 billion in overdraft fees during the pandemic last year.

During a Senate committee hearing in late May, Warren, D-Mass., heatedly asked Dimon: “Without that overdraft money, would your bank have been in financial trouble?”

Dimon responded coolly: “We waived the fees for customers upon request if they were under stress because of COVID.”

A Chase spokesperson said that the bank waived fees on more than 1 million deposit accounts, including overdraft fees, last year when customers said they were struggling — no questions asked. The overdraft fee is $34 at Chase, and customers may be charged a maximum of three Chase overdraft fees per day.

Overdraft fees generated an estimated $31.3 billion in 2020, if one includes big banks, community banks, savings banks, credit unions and fintech firms, which offer financial services digitally, according to financial research firm Moebs Services Inc.

That’s down nearly 10% from the year before. But overdraft revenue could jump back up, as some banks are no longer willing to waive these fees.

An overdraft is triggered when consumers don’t have enough money in their account to cover a bill or make a payment, but the bank or credit union pays it anyway. Consumers then need to make up that shortfall and pay a fee, many times at $30 or $35 a pop.

Because many banks charge multiple overdraft fees in a day, the costs can add up.

“Even banks that ‘limit’ the number of fees per day set that limit at three to six per day, adding up to $105-$210 in a single day,” according to a 2020 report by the Center for Responsible Lending.

The ability to swipe and pay only makes things more tricky for some consumers. And that’s true even though consumers must voluntarily sign up for overdraft coverage for point-of-sale purchases with a debit card or transactions using the ATM.

One strategy is to link a checking account to another account, such as a savings account, as a way to cover a shortfall. The fee for that service can be smaller than an overdraft fee. Vulnerable households don’t often have much in savings, though.

Banks will make sure they’re paid back the amount of the overdraft and all the fees first, according to the center. The bank will get that money from their customer’s next deposit — whether that’s a paycheck, Social Security, unemployment benefits or military or veterans compensation.

“Banks in effect ‘jump the line’ ahead of other essential expenses or debts the consumer has,” the center noted in its report.

“This practice can leave consumers with little to pay for their essential needs. It also prioritizes the account holding bank ahead of a consumer’s other creditors.”

Smith, at the center, said he welcomes some positive changes — including a plan by Ally Bank to eliminate overdraft fees and efforts by others to offer restricted small short-term loans to consumers to deal with shortfalls. But he said regulators will need to step in, too.

Offering people more time to add money to their account will help, as is being done by PNC Bank. But Smith noted that many people who are not being paid a living wage aren’t making enough money to fix the shortfall quickly.

High overdraft fees can be triggered anywhere, even some credit unions that appear consumer-friendly. So, Smith said, it’s important to review how your bank or credit union handles overdrafts.

Some institutions, he said, still engage in practices that some larger banks gave up, such as reordering checks from the largest to smallest amounts in order to maximize overdraft fees.

Here are three strategies that were recently launched to better help customers deal with checking accounts and overdrafts:

First a warning, then some new options

Pittsburgh-based PNC Bank is advertising a product called Low Cash Mode for its Virtual Wallet customers — or currently nearly half of its checking account customers.

The bank is completing the nationwide rollout of Low Cash Mode in June and July.

PNC Virtual Wallet customers get notices of low balances via email, text or push notices. The alert is automatically set if a balance falls below $50. Or the customer can set a different dollar amount for an alert.

The banking app then shows the customer what actual payments are outstanding and which ones would trigger an overdraft given the current low balance.

The customer has 24 hours or more, depending on processing, to put more money into the account before overdraft fees are charged. Options include transferring money from savings to checking, making a mobile deposit or depositing money at a PNC bank branch or ATM. And sometimes, a customer’s direct deposit is only a day away.

A time clock on the app even shows the consumer how much time is left to make a move to fix the problem and avoid overdraft fees.

“Customers are always aware how much time they have; they don’t have to do the math,” said Matthew Steenson, executive vice president, retail national expansion executive at PNC.

After testing the product, Steenson said the bank has found that about 87% of customers so far have been able to get their balance to $0 or better before the Extra Time period expires.

PNC began developing Low Cash Mode before the pandemic hit in 2020, Steenson said, recognizing that technology can be used to give consumers a better banking experience.

He said there’s no guarantee that overdrafts will be zero but many people could see a lot fewer overdraft fees if they take action.

Steenson said advancements in technology make it possible to give customers more information via their smartphones so they can decide what to do.

And PNC is offering a new, digital last resort option, too.

Under Low Cash Mode, the Virtual Wallet customer has a choice to take the extreme step of actually stopping a check or automatic payment entirely if necessary to avoid the overdraft. To be sure, such action could result in someone else like an auto lender triggering a late fee. (Debit card transactions do not qualify for what’s called “Payment Control.”)

The idea is that you can decide if you want to pay the rent. Or maybe you can stop a payment to the neighborhood babysitter for a few days to avoid an overdraft. Stopping some payments won’t trigger other fees but they might upset some people you need to pay.

PNC estimates that the system could help its customers avoid $125 million to $150 million in overdraft fees a year.

CEO Bill Demchak said the Low Cash Mode gives customers a chance to decide what action makes the most sense in their situation.

“We’re putting that choice in the hands of the customer,” Demchak, chairman, president and chief executive officer of The PNC Financial Services Group, said during a virtual news conference April 13.

The overdraft service, he said, is useful because people can make sure that important bills get paid. Many people today, he added, do not balance their checkbooks so they don’t know the exact amount in their accounts at any given time.

But many consumers find overdraftfees to be highly aggravating, too, and the new system may help avoid unwelcome surprises.

Demchak called the banking industry’s overdraft approach “unsustainable.”

The Virtual Wallet product has a maximum of one $36 overdraft fee per day, customized alerts when balances are low and no fees for non-sufficient funds.

PNC’s regular checking account has a $36 overdraft fee — as well as a maximum of four overdraft and returned item fees each day.

Steenson said it’s important to change the landscape when it comes to overdrafts.

“You could argue we win when you mess up,” he said. “We don’t want that. We win when you win.”

A way to get a quick emergency loan

What if you could take out a quick, no-cost loan to cover some badly needed new tires for a car? Or some other sudden expense that shows up before payday?

Huntington Bank, based in Columbus, Ohio, is advertising a new digital-only loan as a way to help checking account customers cover emergency expenses any time of the day and avoid an overdraft fee of up to $37.50.

The bank’s overdraft policy is $23 for each item if it’s the first occurrence in 12 months. But then the fee goes up to $37.50 for each item if this is a second occurrence or more in 12 months. The bank can charge up to four fees per day.

The product, called Standby Cash, gives eligible customers access to small loans ranging from $100 to $1,000 that can be transferred into their Huntington checking accounts.

The bank notes that if customers overdraft, they can transfer money from Standby Cash within the 24-hour grace window to bring their balance positive to avoid a fee.

The loan must be paid back over three months. The bank will not charge interest or fees if customers sign up for automatic payments.

If customers do not sign up for automatic payments, then a 1% monthly interest charge — a 12% annual percentage rate — applies to the outstanding balance.

Not all customers are eligible. To qualify, a customer must have had consistent monthly deposit activity of $750 or more for three or more months, have a checking account that has been active for at least 90 days and be enrolled in online banking.

The bank’s website also notes: Your average checking account balance must be over $0 for the past 30 days. And none of your Huntington accounts are overdrawn for more than 24 hours.

Standby Cash is not tied to a person’s paycheck or a person’s credit score. It’s an immediate line of credit that can be used for emergencies, overdraft and even possibly help build or repair credit.

Standby Cash activity is reported to the credit bureaus and could help build a credit history. Once a Standby Cash account is opened, activity is reported to the credit bureaus, like balance, repayment and age of the account.

When used responsibly, the bank said, Standby Cash could help customers improve, establish or boost their credit scores, a crucial first step in building wealth.

The Standby Cash follows another move in 2020 by Huntington where the bank introduced a program that charges no overdraft fees when small oversights are made.

The bank has a “$50 Safety Zone” where consumer or business customers who overdraw their accounts by $50 or less will not see an overdraft fee. That was increased from the previous $5 limit. The bank also offers a 24-hour grace period for consumers and business customers to make a deposit to fix issues and avoid an overdraft.

Eliminate overdraft fees entirely

Detroit-based Ally Financial took the most unusual step by announcing in June that its Ally Bank would end all overdraft fees.

Diane Morais, president of consumer and commercial banking at Ally Bank, said in a phone interview that many people who are living paycheck to paycheck deal with overdraft fees because they typically have low balances in their accounts.

“What we are doing is taking one piece of stress and anxiety out of the equation,” Morais said.

“The last thing we want to do is create a bitter problem for consumers.”

Experts note that Ally isn’t going to lose as much as other big banks would by making such a move. Ally generated $5 million in overdraft fees in 2020 even after waiving those fees from March through July last year for all its customers. In 2019, Ally reported $6 million in overdraft fees.

Even so, the move could draw others to reconsider how overdrafts are handled.

Morais said financially vulnerable consumers have a disproportionate chance of being hit with overdraft fees.

“Adding one or two or up to five fees a day can really set someone back in a material way,” Morais said.

“You’ll continue to see a lot of banks setting up other types of accounts for consumers who are more likely to overdraft,” she said.

Ally Bank has charged one overdraft fee per day of $25 and never charged overdraft fees for debit card transactions.

Roughly 1 out of every 8 Ally bank customers overdrafted at some point.

The number of accounts Ally closed year-to-date because of insufficient funds is less than .05%, the company said.

Generally, customers have six business days to bring their account back to a positive balance. If they’re not able to bring their account positive after six days, their account may be limited, but Ally said it will “work hard to understand their specific situation.”

Morais said 80% of the bank’s customers “do cure their negative balance within the first six days.”

She said Ally didn’t want to put in a hard floor where it would never allow an overdraft — as some in the industry are doing now with some accounts.

She said Ally Bank would continue to decide what payments it will approve to go through if the customer’s balance won’t cover it, much like is done now.

For example, a small overcharge on groceries is likely to still go through if you don’t have enough money in your account, she said.

“If you’re buying a $4,000 TV, probably not,” she smiled in a Zoom call.

She noted that many times people don’t want a purchase automatically rejected if there’s not enough money in an account, such as if you’re buying gas at 11 p.m.

By permanently removing overdraft fees entirely, though, Ally said it will help protect consumers disproportionately hurt by overdrafts.

About 95% of the consumers who paid overdraft fees in 2020 were “financially vulnerable” and disproportionately Black and Latinx, according to the 2021 FinHealth Spend Report.

And “among those financially vulnerable households with checking accounts, 43% averaged 9.6 overdrafts during 2020, resulting in annual overdraft fees of hundreds of dollars per household on average,” the report stated.

The report noted that financially struggling households spent $255 billion in 2020 on fees and interest related to everyday financial services, such as credit cards, auto loans, and overdraft charges. Struggling households spend a greater share of their income on such fees, compared with those who are financially healthy.

The pandemic — and the racial injustice protests of last summer — put more focus on the role that high overdraft fees play in economic and racial disparities.

And this summer, it’s a hot topic that more banks and credit unions will likely need to address.