As CFPB Blasts Unfair Overdraft Fees, Capital One Says It’s Eliminating Them

Well, that was fast.

No sooner had the Consumer Financial Protection Bureau (CFPB) published new research Wednesday (Dec. 1) highlighting the cost and impact that overdraft fees have on consumers and the $15 billion in revenue they generate for large banks each year, and the nation’s sixth largest lender announced that it was doing away with them.

The dual overdraft fee announcements from the CFPB and Virginia-based Capital One Financial are not only coincidental, but perhaps also prescient if other banks chose to follow suit. As much as consumers, particularly the 60% of American families that are living paycheck to paycheck, loathe getting hit with these $35 overdraft charges and other account related fees, for banks, this reliable revenue stream has become an enormous source of income.

In fact, according to the CFPB’s data, just three large banks (JPMorgan Chase, Wells Fargo and Bank of America) accounted for 44% of the total overdraft fees in 2019. At the same time, the report said, 80% of those fees were paid by less than 9% of account holders that faced over 10 such levies per year.

In blasting what it called the “fee harvesting practices,” the federal financial watchdog said it planned to take action against large financial institutions that are “hooked on exploitative junk fees” that can quickly drain a family’s bank account.

“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” said CFPB Director Rohit Chopra said in prepared remarks and a press release. “We will be taking action to restore meaningful competition to this market.”

Calling the situation a clear market failure, Chopra, who has headed the agency for just two months and will turn 40 in January, said the CFPB was following its Congressional mandate to ensure financial products and services are fair, transparent, and competitive, while pledging to enhance its scrutiny of the nation’s big banks.

A Three-Pronged Approach

For its part, the CFPB said it would take action against institutions and individuals that violated the law, that it would prioritize examinations of banks that are most reliant or have the highest share of customers facing recurring overdraft fees or above average fee burdens, and that it planned to harness technology that enable families to vote with their feet and easily fire their poor-performing banks.

“Unfortunately, switching bank accounts isn’t easy. It involves new account numbers, new debit cards, updating direct deposit, updating auto-debits, and much more,” Chopra said, pointing to the potentialities that are now available through open banking infrastructure. “It will be harder for banks to trap customers into an account for the purpose of fee harvesting,” he added.

Chopra also noted that the fee collection practices by big banks have coincided with record earnings, pointing to FDIC data that showed insured banks profits rose 36% last quarter to $69.5 billion and were on track to eclipse pre-pandemic levels for the full year.

People also read: Eliminating Overdraft Fees Isn’t Easy Fix for Banks, Customers

Ally Bank, Capital One and … ?

To be sure, it is never easy for any business to walk away from a proven source of revenue, but some banks, like Capital One and Ally Financial, are making the move on their own, as are other FinTechs and neobanks looking to attract new customers.

Calling its move to eliminate overdraft fee and provide free overdraft protection another step in its efforts to bring “ingenuity, simplicity and humanity to banking”, Capital One CEO Richard Fairbank said it was all part of reimagining banking.

“The bank account is a cornerstone of a person’s financial life,” Fairbank said in a press statement. “It is how people receive their paycheck, pay their bills and manage their finances. Overdraft protection is a valuable and convenient feature and can be an important safety net for families. We are excited to offer this service for free.”

For its part, Ally Financial took a similar step in June while other startups, such as the Los Angeles-based Dave Bank, which is a reference to David versus Goliath, have use the absence of fees as a major selling point that gives customers $250 per year in extra money.

“We’re going after the biggest pain point we found for customers in this country, which was overdraft [fees],” Dave CEO Jason Wilk told Yahoo Finance, noting that its non-fee policy had proven to be a great way to build financial relationships.