This week, online-only banking firm Ally Bank announced that it will no longer charge its customers overdraft fees.
This is good news for their current or prospective customers who are concerned about breaking a check or charging their debit card that they don’t have enough money for.
Sure, we should never do that, but sometimes it happens and historically the bank makes a lot of money on fines.
Ally’s decrease in overdraft fees is big news for the entire banking industry, generating billions in overdraft fees and insufficient funds. Ally’s move could put pressure on other banks, including long-established companies, to follow suit.
What overdraft fees mean for the banking industry
In early 2020, when the coronavirus pandemic broke out, millions of people lost their jobs and millions more had to cut their hours. While the federal government launched financial aid programs, banks were encouraged to temporarily cancel their overdrafts and insufficient fund fees.
Many, but not all, banks and lenders have followed suit. Bank of America, JP Morgan Chase, and Wells Fargo each reported over $ 1 billion in overdraft fees in 2020 The American prospectus.
Even with the banks and lending companies that waived overdraft fees in 2020, these steps were always viewed as temporary until Ally Bank announced on June 3, 2021 that it would permanently suspend overdraft fees and insufficient fund fees.
Most banks charge a fine of $ 25 to $ 35 per transaction, so a consumer who had a busy but lousy day and needed overdraft protection, say, five times. You can see how these fees add up. Before the pandemic, Ally assessed the fine per day ($ 25) rather than post-transaction.
What no overdraft fees mean for you
“No overdraft fees” means consumers will not be penalized for overdrafting their accounts.
What it does NOT mean is that you can spend whatever you want.
According to the Federal Reserve Bank of San Francisco, consumers used debit cards for 28% of purchases and payments in 2019. They used credit cards for 23% of payments and cash for 26%.
Payment by check is the way most consumers overdraw their accounts as debit cards rarely allow consumers to spend more than what is on their accounts. In 2018, check payments made up only 8.3 percent of cashless payments.
Most banks that charge overdraft fees do not give the customer a time cushion to meet their financial obligations. While some banks allow a customer a 24 hour window to make a deposit to cover an overdraft with no penalty, most do not.
The old story of overdrafts (like 18 months ago)
Before the pandemic, and for almost as long as banks have existed, banks figured out a way to charge customers for trying to spend more than they had in their accounts.
Either they charged a fee for the overdraft (in some cases the fees ranged from $ 25 to $ 30 per overdraft) or they charged customers with “overdraft protection,” which provided financial protection for overdrafts when the customer did so anyway had to come with the money they spent over their account balance. Overdraft protection fees average between $ 30 and $ 35 per month.
Fees for Financially Vulnerable People
The main problem with overdraft fees, or overdraft protection, is that they are needed most by the people who could least afford them: people with low checking accounts or those who live from paycheck to paycheck.
The Consumer Financial Protection Bureau estimates that 30% of bank customers overdraw their bank accounts annually. The FinHealth Spending Report 2021 stated that 95% of consumers who paid overdraft fees were considered “financially vulnerable” and a disproportionate percentage of those consumers were either black or Latinx.
The recent history of overdrafts (since the pandemic hit)
In the digital age, consumers can “bank” safely about overdrafts and insufficient fund fees, but only if they do so without paper checks. Fintech apps like aspiration and Carillon do not have overdraft fees, but due to the immediate nature of electronic transactions and the updating of account information, they are also difficult to overdraw.
Likewise, Discover Financial does not charge for overdrafts, but Discover Financial and fintech apps are not legally “banks”.
Banks must be officially chartered with the federal government, which is Ally. Banks offer checking and savings account services and are allowed to make profits where overdraft protection and fees come into play.
Kent McDill is a seasoned journalist who has specialized in personal finance topics since 2013. He is a contributor for The Penny Hoarder.
This article originally appeared on www.thepennyhoarder.com