U.S. Consumers Stand To Save Billions From Banks’ Overdraft Reforms


In one of the first efforts to tally the impact of recent overdraft fee reforms, a new analysis finds that changes under way at just five banks could save consumers more than $2 billion annually.

The Pew Charitable Trusts reviewed announcements last month by Bank of America, Wells Fargo, U.S. Bancorp, Truist Financial and Regions Financial to determine how much money each company could forfeit in fees.

Those five banks all unveiled new overdraft programs over the course of nine days in January, which Pew called “a watershed month for boosting consumer protections” in the banking industry.

“For those who are underbanked and who use payday loans and other forms of high-cost lending, these changes over time could be worth billions of dollars a year,” said Alex Horowitz, principal officer in Pew’s consumer finance project.

The ultimate impact of the changes — both at the five banks Pew studied and elsewhere — will depend on how U.S. consumers respond. In addition to reducing overdraft fees and making it easier to avoid paying the charges, some banks are introducing small-dollar loans that could serve as a substitute for overdrawing a checking account.

The $2 billion estimate could go higher, depending on how much borrowers at the five banks wind up saving by tapping into small-dollar loans, Horowitz said.

Bank of America and U.S. Bancorp already had small-dollar loans available, up to $500 and $1,000 respectively, before they announced revisions to their overdraft policies. Wells Fargo, Truist and Regions plan to roll out such loans, from $500 to $750, later this year.

The loans will be particularly helpful to customers who frequently use overdrafts as short-term credit and therefore incur substantial fees, Horowitz said. Pew research has shown that 18% of bank account holders pay a whopping 91% of all overdraft fees in the United States.

The fact that more banks will offer small-dollar loans “is a very, very positive change,” Horowitz said. “They are offering liquidity with time to repay … and customers need help repaying.”

The sweeping changes come as large and midsize banks face pressure from both regulators and competitors to reduce their reliance on overdraft fees.

Some banks are eliminating fees charged when overdrawn customers attempt unsuccessfully to make a purchase, as well as fees charged when a negative balance gets covered by a transfer from a linked account. Some banks are giving customers longer grace periods before charging fees or limiting the number of fees that customers can incur each day. In a couple of cases, banks are ditching overdraft fees entirely.

In the last four weeks, Toronto-Dominion Bank’s U.S. retail banking unit, First Citizens BancShares in Raleigh, North Carolina and M&T Bank in Buffalo, New York, have also announced changes to their overdraft programs.

Pew reached the $2 billion figure by analyzing revenue projections by Truist, U.S. Bancorp and Regions, and estimating similar figures for Bank of America and Wells Fargo, Horowitz said.

Truist expects its changes to result in a roughly $300 million annual decrease in overdraft-related income — almost 60% of the company’s total — by 2024.

Regions estimates that service charges on its deposit accounts will be 20% to 30% lower than the $729 million it collected in 2019. And U.S. Bancorp projects that it will lose $160 million to $170 million in annual fee revenue when all of its changes are implemented.

Across the U.S. banking industry, overdraft fee revenue ticked up between 2016 and 2019, eventually reaching $17.2 billion, according to a recent analysis by the advisory firm Curinos.

But overdraft fee revenue dropped sharply in 2020, in part because banks temporarily dropped the charges to help customers manage through the early days of the pandemic, but also because customers had more money in their accounts due to government stimulus programs.

The growing number of banks tweaking their overdraft programs is “clearly overwhelmingly positive and frankly long overdue,” said Rob Levy, vice president of research and policy at the Financial Health Network, a nonprofit group focused on financial wellness.

In particular, the addition of more small-dollar loan options are “a piece of the puzzle” in reducing consumers’ reliance on overdrafts, Levy said. Notwithstanding a few banks that have recently slashed prices, the standard overdraft fee has long been around $30 to $35.

Small-dollar loans are also critical in bringing more people into the banking system and keeping them there, Levy said. “The announcements that we’ve seen seem to be structured in a much better way — low fees, transparent, accessible,” he said.

Because eligibility for the small-dollar loans appears to be based on having an established relationship with the bank, and not on the customer’s credit score, the loans should help increase inclusion in the banking system, he added.

While banks are taking important steps, it remains to be seen how the changes will ultimately affect customers, and just how much banks will ultimately lose in overdraft-related fee income, Levy said.

“The question is, what’s going to happen to the behavior of the high-frequency overdrafters after these changes, and thus to the vast majority of fees, which come from them?” Levy said.

“If the changes mean that they overdraft less … and the number of fees paid by that group shrinks, then we’ll see a serious reduction in fees and, as a result, a reduction in revenue for the banks.”