Bankrate.com Chief Financial Analyst Greg McBride details the growing pressure for more big banks to do away with overdraft fees after Capital One did so.
- And [INAUDIBLE] what is in your wallet? If you happen to be a Capital One customer, maybe a little bit more cash. The bank announced it is getting rid of overdraft fees-- the first big bank to do so, music to many Americans ears struggling with higher costs and rising inflation. Here to discuss it all is Greg McBride Bankrate.com chief financial analyst. Thank you so much, Greg, for being with us today. So Capital One is a [? sixth ?] biggest retail bank in the country yesterday. It said it's getting rid of fees tied to insufficient funds and overdraft rates starting in January. Why is it doing it now and how much is it saving on each transaction, each overdraft fee for customers?
GREG MCBRIDE: Well, these overdraft fees have been in both the regulatory and the legislative crosshairs for some time. And that pressure is increasing. You've seen some smaller challenger banks that have touted the fact that they don't charge overdrafts. Now you're starting to see bigger banks get into that. Ally Bank, for example, eliminated their overdraft fees back in June. And, of course, with Capital One doing it now, that's really planting a flag in new territory as far as bigger banks are concerned. And, you know, this may only impact a small segment of the banking public, but it does so in an outsized way.
The average overdraft fee is more than $33. And the most common fee that we asseted is $35 per overdraft. So this is something that can take a big bite out of someone's account in a very short period of time. Having that removed, I think, is something that's going to be clearly beneficial for that segment of households that tends to overdraft at a more regular clip. About 10% to 15% of bank customers historically have accounted for 80% to 90% of the overdraft revenue.
- You know-- and I want to ask you about the amount of revenue that Capital One could be losing by making this decision and where might we see them try to make it up. Are they going to tack on, you know, different fees to other products, perhaps, as they try to make up for that lost revenue?
GREG MCBRIDE: Well, their impact is apparently in the neighborhood of about $150 million a year. And while that's a lot of money, it pales compared to what some of the larger banks are earning on overdraft revenue. So what we have seen just, sort of, collectively in the past is that the fees do tend to be a game of whack-a-mole in a bit in that when you start to see fees dialed back for things like overdraft or debit card interchange, free checking accounts where the casualty. We saw this play out once before when new regulations were enacted. We saw the prevalence of free checking accounts basically cut in half within a few years. More recently that trend has been moving in the right direction. We actually found the highest incidence of free checking accounts this year since 2010. But that trend could be a casualty if there's a broader movement to dial back or restrict overdraft income.
- And, Greg, you know, Consumer Financial Protection Bureau says banks poach nearly $15.5 billion in overdraft fees in 2019. I think we all remember Senator Elizabeth Warren calling JPM's CEO Jamie Dimon the star of the overdraft show, right? So now are big banks forced in some way to, sort of, follow suit after Capital One because, as you say, lawmakers have been pushing for this for quite some time now?
GREG MCBRIDE: Yeah, I don't think the pressure is going to come from the competitive side. But it is certainly going to come from the legislative side and quite possibly the regulatory side as well. And so I think what you're going to see is particularly larger banks that derive more revenue from overdrafts that increasingly they're going to face the question of why and, I think, to some extent being asked to justify, how they can continue to charge these fees, $35 a pop, when competitors, particularly those of a similar size, now are [? not. ?]
- What can-- you know, until this goes widespread, I guess, what can people do to help protect themselves from having to pay these overdraft fees. I mean, I guess to some extent you can call the bank and negotiate with them. Or, if you're not a serial overdrafter, you could ask if they would waive it once or twice. But beyond that, what can people do?
GREG MCBRIDE: Yeah, some proactive steps that you can take care and-- look, this applies even for Capital One customers for now because this doesn't take effect until early next year, so it's a little early to let your guard down. You don't want to be triggering overdrafts in the meantime. So set up a link between your checking account and your savings account. Maybe it makes sense to keep a small savings account at the bank where you have your checking account just so you can proactively move money over if the balance gets low. You sign up for email or text alerts that let you know when your balance gets low so you can be proactive about it.
You know, one of the things is get in the habit of checking to see what your available account balances before you initiate transactions. key word there "available" because that check you deposited yesterday probably isn't ready for immediate withdrawal and you want to know that before you initiate a transaction. So sometimes that's just as simple as pulling out your phone, logging onto your account, see what the available account balance is. That's a good habit to get into to avoid those overdrafts.
And then, finally, if you had previously opted in to overdraft protection on small dollar ATM and debit card transactions, you want to get out of that. There was a big push by the banking industry 10, 11 years ago to get people to opt in when in reality you're better off just being denied. You don't want that coffee and bagel on the way to work in the morning to also cost you a $35 overdraft. So make sure that you're not opted in to that service.
- OK, we will have to leave it there. Greg McBride, Bankrate.com, chief financial analyst. Thank you so much for your--