Eliminating Overdraft Fees Isn’t Easy Fix for Banks, Customers

The holidays are firmly upon us, which means that the urge to spend is firmly entrenched as well, boosted by family gatherings and coming face to face with people you haven’t seen in person for months (and months).

And with the urge to spend — to get those gifts for everyone on the list, even that aunt who constantly asks you when you’ll meet someone nice and settle down — brings with it the specter of overspending.

The logic follows that, amid the overspending, especially with debit transactions linked to checking accounts (which still hold sway amid the current holiday season), overdraft fees will be on the rise.

But: A number of banks are eliminating overdraft charges, typically a significant contribution to revenues. And a number of FinTechs are crafting their own digital-only offerings that seek to lure consumers by, among other things, actively promoting the fact that their own checking services do not feature overdraft fees.

Which leads to a few questions — namely, whether eliminating the fees might in part encourage people to spend more than they really can, or whether they’ll simply be stymied by declined transactions, which ultimately leads to a poor customer experience.

In just a partial roster of names that have been ditching overdraft charges, Santander Bank said earlier this month that it would eliminate the fees, in part, by raising the no-fee threshold to $100.

Read more: Santander to Axe Overdraft Fees for One-Third of Customers

Elsewhere, in June, Ally Bank said it had eliminated overdraft charges for all of its customers.

Separately, companies like Chime offer options including SpotMe, which “spots” participants up to $200, should they spend more than they have on hand — and then that amount is deducted from that consumer’s next paycheck. In another model, Brigit focuses its business on overdraft activity. Among other offerings, for a monthly fee, the company will transfer as much as $250 into users’ accounts to help sidestep overdraft fees.

Beyond the somewhat simpler model where, in the absence of overdrafts, financial institutions will simply decline transactions, the various setups, including funding overspending and then debiting that from the next paycheck may, arguably, encourage less-than-ideal consumer behavior. Transactions that are funded right now result in a smaller “paycheck pie” to be used to pay some of the most essential expenses that might come down the line (like food or rent). In other words, there’s no lending model that exists for “free.” Consumers, of course, increasingly must “opt in” to overdraft protection with their traditional FIs, indicating at significant level of transparency.  And, as Karen Webster noted in a column earlier this year, “stacking” on overdraft charges has been prohibited.

In an age where a greater percentage of Americans are living paycheck to paycheck, it may be the movement away from paper check, and the increasing availability of instant payments and Request to Pay (and instant settlement) that help close the gap between spending, knowing what’s on hand to spend, and knowing when the charges hit one’s accounts. And, as Webster noted, several banks have been piloting programs with “grace periods” that let customers make up payments. In the end, though, the give and take, the delicate dance of managing cash flow (money in and money out) really needs a boost from real time insight gleaned by consumers as they manage their accounts.