Myth of ‘Free’ Checking Costs Consumers Over $8 Billion a Year

Excerpts from comments to the Consumer Financial Protection Bureau about overdraft fees
US consumers who frequently overdraft drive more than half of the profitability of mass-market checking accounts.

Letitia O’Brien was down to about $1.70. It was March and the 62-year-old retired nurse had found herself here before. Months earlier, when she didn’t have enough to cover an electric bill around $300 and a CT scan of her chest that cost her about $100, her account with PNC Financial Services Group Inc. overdrafted, triggering a chain of $36 fees. Now she was worried that an upcoming grocery delivery could put her back in the same dark place.

“I’m just laying here worrying,” O’Brien said. “If that hits my bank before I get my next disability check, then I’m in big trouble—again.”

Earlier this year, when the Consumer Financial Protection Bureau put out a request for comments about junk fees, part of its push against overdraft and other charges, O’Brien was one of more than 50,000 people who wanted their voices heard. “I’d like to see them eliminate the fees altogether, but that’s never going to happen,” she said. “Let’s be realistic.”

For some, the overdraft fee—a thirty-something dollar charge every time someone spends more than they have in their checking account—is nothing more than a pesky inconvenience. But with the US teetering on the edge of a recession, the fee can mean the difference between putting food on the table and spiraling into distress for millions of Americans like O’Brien.

Many Americans enjoy free checking accounts on the backs of the fees paid by poor people. Customers who pay overdraft fees again and again—who typically have no more than a few hundred dollars in the bank—are responsible for over half the profits from mass-market consumer checking accounts at the biggest US lenders.

For their part, bank executives see it differently, saying that customers who never make good on their overdrafts force them to write off millions of dollars. The fees, they argue, enable them to shoulder the costs and offer a lifeline to customers. Lindsey Johnson, who runs the trade group Consumer Bankers Association, said lenders “have taken meaningful steps to lower costs, strengthen transparency, and protect access to an emergency safety net.”

Recent moves from Washington to Wall Street give reason to think overdraft is finally about to disappear. Yet lenders, especially the thousands of banks around the country too small to be in the CFPB’s purview, are not giving it up without a fight. Some major banks are simply devising replacements for overdraft-related service charges, pushing customers into new kinds of accounts that often come with other fees.

Raking It In

Overdraft fees made the biggest banks billions in 2021—and boosted the profits of smaller ones
Notes: Reported figures for banks that have an asterisk (*) next to their name have been adjusted to reflect mergers and are approximate. Data are displayed for entities that file call reports and may not represent all income for a bank’s parent company. Cities listed correspond to the headquarters location of a bank’s parent company.

When overdraft fees first surfaced decades ago it wasn’t Wall Street that came up with the concept—it was consultants. An army of independent advisers spent much of the 1990s pitching bank executives on the powers of implementing “overdraft privilege” programs. The consultants came armed with data showing that a customer who’s charged one non-sufficient-funds fee per month generates as much profitability for lenders as one maintaining a $12,000 average balance, according to a 2003 report. They taught lenders how to order the processing of consumer transactions to maximize overdraft fees. Instead of making their normal efforts to collect on debts, banks were told to send letters thanking customers for overdrafting, even as they charged them for it.

The scheme was more profitable than Wall Street could have ever imagined, with overdraft and related fees soaring to about $34 billion a year by 2008. The head of one midsize lender even named his boat Overdraft.

For years, the fees seemed untouchable. The revenue they brought banks held steady despite protests from consumers, regulators, and lawmakers. Even in a Senate hearing last year, when Massachusetts Democrat Elizabeth Warren told JPMorgan Chase & Co. boss Jamie Dimon that he’s “the star of the overdraft show” and asked him to refund the fees his bank collected at the height of the pandemic, he had a one-word answer: no.

Americans aren’t alone. UK regulators found the fees their consumers paid for unexpected overdrafts were 10 times higher than the ones for payday loans, and they expect new rules to reduce overdraft revenue by as much as a third. In Australia, a 2020 survey found that most of its bank accounts charge overdraft fees.

Some Wall Street institutions started to change their tune after a new head of the CFPB, Rohit Chopra, took over last year. Banks, of course, had other reasons to budge. As pandemic lockdowns curbed spending, stimulus checks padded consumers’ wallets and banks waived fees, big banks JPMorgan, Wells Fargo & Co. and Bank of America Corp. collectively reported about $2.8 billion less in overdraft revenue in 2020 and 2021 than they had in the two previous years. Despite the revenue drop, each still made more than $1 billion annually from the fees.

Pandemic Drop

A slowdown in consumer spending and a boost in federal aid contributed to a decrease in overdraft fees
Note: Data have been adjusted to reflect mergers and include only banks that reported overdraft fees for all 7 years

Late last year, Capital One Financial Corp. said it would ditch the fees and Citigroup Inc. announced the same in February. Bank of America lowered its overdraft fee to $10 and Wells Fargo vowed to end non-sufficient fund fees, which are typically charged when a customer writes a check and it bounces. Toronto-Dominion Bank, whose US unit earned 27% of its non-interest income from overdraft last year, said it expects those fees to face a “meaningful decrease” after allowing customers to overdraw their account up to $50 before incurring a charge. JPMorgan made a similar move. “We may be a day late and a dollar slow, but if it’s appropriate, we’re going to make a bunch of changes,” JPMorgan’s Dimon said last year, three months after the Warren showdown.

But even with all the changes, a recent survey by Morning Consult found that seven in 10 bank customers who overdrafted their accounts reported they are still being charged. One of the original consultancies from decades ago, Strunk, continues to sell banks on ways to boost their overdraft fee income: “Does your front-line staff have a biased opinion regarding overdraft privilege and present it in a negative tone?” one post on its website asked this year. There are already signs the fees are staging a comeback. In the first quarter, revenues from overdraft and non-sufficient funds “stopped their decline and reversed somewhat,” ending about a fifth below pre-pandemic levels, the CFPB reported.

O’Brien, the retired nurse, was still as nervous as ever about her account in July. “When one’s money is as tight as mine is, money is all one thinks about, down to the penny,” she said from her home north of Orlando, Florida. Yet again, she had gotten charged for overdrafting her account, though to her surprise and relief PNC refunded the fee. If she could keep avoiding those charges, she said, “I might be able to get out of this hole.”

What the Public Says

👆When the CFPB asked consumers to weigh in on overdraft and other fees, they revealed the pain the charges inflicted
Sources: CFPB,

Nowhere is the industry’s appetite for these fees clearer than inside small and midsize lenders. Take First National Bank Texas, controlled by the family of longtime debt-collection executive Jerold Katz. Also known as First Convenience, it’s headquartered not far from the Fort Hood Army base and operates more than 300 branches. Last year, overdraft fees alone accounted for a quarter of its revenue. The bank, which earned more than $100 million annually on overdraft charges for the past seven years, announced a new feature in January that will refund a customer’s fees from the previous day if an account wasn’t overdrawn by more than $12 by day’s end.

Padding Profits

Banks with the highest share of non-interest income from overdraft in 2021
  • Overdraft fees
  • Non-interest income

For bigger lenders, the rise of fintech is creating pressure to abandon overdraft fees. Digital rivals, with ads plastered on subway cars and billboards, are drawing younger customers by promising no fees for basic checking accounts. Companies with names like Chime and Varo now serve nearly a fifth of the primary banking relationships in the US.

Even as Wall Street moved to distance itself from overdraft fees, it has found others. Two years ago, Bank of America crafted a new type of small-dollar loan that comes with a flat $5 fee when customers borrow between $100 and $500. In other cases, lenders have begun offering accounts that don’t let consumers overdraft and instead charge about $5 every month in maintenance fees. At JPMorgan, that revenue rose to $665 million last year from $633 million in 2019 as the banking giant added millions of new customers.

Last year, PNC announced a new service called Low Cash Mode that gives customers a cushion of at least 24 hours to get back into the black after going negative and caps overdraft fees at one per day. Since then, about two in three customers have handled their overdrafts within the extra time without getting charged, according to Karen Larrimer, PNC’s chief customer officer. More often than not, “it isn’t that they don’t ever have the money, they have a timing issue,” she said.

To end overdraft for good, Washington will likely have to intervene. While “many Americans will see a substantial reduction in their overdraft fees,” said Aaron Klein, a senior fellow at the Brookings Institution, “absent legislation or regulation, there will still be many families trapped in high-cost products with a series of financial institutions purporting to be banks and credit institutions but acting like check cashers.”

When the CFPB asked consumers this year to comment on bank fees, the agency got more than just complaints. Some people warned the government against making things worse by “overpolicing” or getting in the way of competition, and one bank veteran in Delaware told overdrafters to “try living within your means.”

For now, senators continue sending letters to the banks, and the banks continue sending letters to senators. Bills to curb the fees, including the Overdraft Protection Act and the Stop Overdraft Profiteering Act, have floundered in both houses of Congress, while industry lobbyists continue to push back.

Even PNC’s Larrimer says some big banks shouldn’t be applauded for their recent moves to abandon overdraft fees. “They were able to get a headline and hardly impact their business,” she said. “We’re giving up $125 million,” and maybe more.

To help make it up, PNC is working on building “something that consumers will find value in and want to pay for,” Larrimer said. She pointed to a five-year-old service called Express Funds that gives customers immediate access to the checks they deposit—for a fee.