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Blog: Customers Want Transparency, Not Hidden Overdraft Fees

Thursday, January 25, 2018

Earlier this week, Bank of America (BoA) announced that it is discontinuing its free checking product for customers with low balances and switching them to BoA Core Checking accounts that charge an upfront $12 monthly fee. The fee can be waived if the customer maintains a daily minimum balance of $1,500 or has a monthly direct deposit of $250. Further, if you are a student under the age of 24, the fee is also waived. If a BoA customer wants a more affordable option with some penalty protection, the bank does offer their lowest-fee option—a Safe Checking account, which charges a monthly fee of $4.95 . This option protects account holders from overdraft fees but does not include paper checks.

Five years ago BoA had stopped enrolling new customers in the free checking product, and now it is converting its existing accounts as well. BoA’s decision to discontinue their free checking product for a transparent monthly fee is similar with the pricing structure of other big banks—such as Wells Fargo, Chase, and Citibank—that have monthly checking account fees that range between $10 to $12 with similar options to waive the fee. A disclosed upfront cost is a good practice, but we encourage banks to consider waiving this fee for account holders below a certain threshold.

Big banks are often criticized for their hidden fees, but what BoA is doing is taking a transparent step to ensure their customers know what their getting upfront instead of hitting them with costlier, unfair fees or penalties.

The reported notion that checking account fees is the biggest source of money for the big banks is misleading. The biggest revenue stream for the big banks is abusive overdraft fees, which severely harms low-income families and customers of color and is one of the main reasons why people are driven out of the banking system altogether. Cumulatively, banks generate $14 billion annually in revenue through overdraft fees. And in the aggregate, a $12 monthly checking account fee is cheaper than being hit with multiple $30 or more overdraft fee penalties that that come with "free checking."

Over the last 15 to 20 years, many financial institutions have betrayed the trust of their account holders by replacing what was once an occasional accommodation with an exploitative system of routine high-cost overdraft fees that drive account holders deep into debt. The fees are so lucrative for banks, particularly on debit card transactions, that banks push them on customers and misrepresent the purported benefits of overdraft products and how they work. Often, these misrepresentations lead consumers to believe they will not be charged an overdraft fee in circumstances when in fact they will.

These misrepresentations help banks to maximize the number of individual overdraft fees they charge—averaging an unreasonable and disproportionate $35 each, totaling $14 billion annually. Some banks, like BoA, do not charge overdraft fees on debit cards—we would encourage other banks to follow this lead to end this abusive fee practice.

Last year, the Consumer Financial Protection Bureau exposed the extent to which large banks’ abusive overdraft fees drain working families’ checking accounts. The study found that nearly 80% of bank overdraft and non-sufficient funds (NSF) fees are borne by only 8 percent of account holders, who incur ten or more fees per year, with many of those customers paying far more. For one group of hard hit consumers, the median number of overdraft fees was 37, nearly $1,300 annually, meaning some pay much more. The study also confirmed that overdraft fees on debit cards can lead to extremely high cumulative fees for consumers.

Here at CRL, we’re not against a modest account fee that is disclosed upfront—especially if it means that the customer knows what they’re getting. What we are against is the masquerade of "free checking" where big banks rely on getting your money by price gauging you with overdraft fees that are targeted at the most vulnerable account holders.