A potential crackdown on excessive overdraft fees : The Indicator from Planet Money Banks make billions on overdraft fees every year. So why are some of them walking away now?

Overdraft fees: From perk to penalty

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SYLVIE DOUGLIS, BYLINE: NPR.

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ADRIAN MA, HOST:

I got my first debit card in the mid-2000s, right? I was in college, and I remember thinking, this is pretty sweet, right? I don't need to carry around cash, and if I need a textbook, I can just swipe. And, you know, if I want a burrito for lunch, swipe, swipe - right? - easy peasy (ph) until I swiped one too many times, overdrew my account and got hit with an overdraft fee.

STACEY VANEK SMITH, HOST:

Oh, the overdraft fee. And they're not nothing. I've been hit with them, too. It's like, you know, often, like, 30, $40. It's a lot.

MA: Yeah. And the thing that's always confused me is, like, why didn't they just stop the payment if I didn't have the money, right? Instead, they charge me money for not having enough money.

VANEK SMITH: Still, you know, these fees - they're just something that you deal with if you want to have a checking account, right? But that might be changing. This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

MA: And I'm Adrian Ma. In recent days, companies like Bank of America, Wells Fargo, Capital One - they announced they're scaling back or even eliminating overdraft fees.

VANEK SMITH: They are also among the many banks that make a lot of money from overdrafts and similar fees. According to the Consumer Financial Protection Bureau, these fees recently made banks about $15 billion in one year. So why would banks ever back away from this, and why are they backing away now?

MA: Today on the show, the evolution of overdraft fees - how they went from a perk for wealthy clients to a penalty so despised, some banks are leaving hundreds of millions of dollars on the table.

VANEK SMITH: Also, we should mention Capital One and Bank of America are NPR sponsors.

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MA: So where did overdraft fees come from? Chi Chi Wu is a staff attorney at the National Consumer Law Center, and she says to understand that, you've got to go back to a time before banking really became digitized.

CHI CHI WU: So back in the day, before debit cards and ATM cards, there was basically two ways you access your bank account. You wrote a check, or you went to the teller and got cash.

MA: And when the bank got a check, an employee probably wearing one of those, you know, green eye visors would manually verify that the person writing the check had enough money in their account before they transferred the funds. But what if that account did not have enough money to cover the check?

WU: One or more, the checks would bounce. They would be returned for insufficient funds.

VANEK SMITH: And some loyal bank customers didn't like that. They were like, hey; you know I'm good for this. Can you just please let the check clear?

WU: So then banks started thinking, well, we don't want to bounce checks for our best customers, you know, for the guy that might have tens or hundreds of thousands on deposit or a big loan with the bank. So as a courtesy, we'll pay the check. But we're still going to charge them the return check or the bounced check fee because that's only fair, right?

VANEK SMITH: The overdraft fee was born, and the overdraft fee continued to be this kind of courtesy that banks would offer to preferred customers until the '90s.

MA: Chi Chi says around that time, there were all these financial consultant companies going around selling what's called core banking systems. This is basically backend software banks use to electronically manage their accounts.

WU: The problem is that some clever consultants started realizing, hey; if you encourage people to overdraw their accounts and you charge them 20, $30, that's a good chunk of money.

MA: And it would be easy - way easier than the old days, right? With software, banks could make it so any account that overdraws automatically incurs a fee.

VANEK SMITH: By the early to mid-2000s, the practice of automating overdraft fees had spread to banks around the country. And Chi Chi says at the time, she remembers lobbying federal regulators and telling them, you know, you should worry about this.

WU: I kind of feel like one of those people who can predict things, and nobody ever listens to them because I was like, you know, they're going to start slapping this on debit cards. And it's not just going to be the small banks and credit unions. The big banks are going to start doing this once they see how profitable it is. And that's exactly what happened.

MA: And a lot of customers weren't even aware of the change. According to a federal study around that time, 75% of banks automatically enrolled customers in their overdraft programs - didn't even ask them.

VANEK SMITH: And as Chi Chi feared, banks increasingly charged overdraft fees on debit cards, too.

WU: There's no reason to allow overdrafts on debit cards. You can ping the bank and say, hey; does Chi Chi have enough money in her bank account to allow this transaction? Or should we just say no without a fee?

MA: If that's the way it could easily work, why do you think most banks didn't end up doing that?

WU: It's all about the fees. It's all about how much money they could make on overdrafts, and they make billions on overdrafts.

MA: For large banks, overdraft fees can be around a percent or two of their revenue. But for smaller banks, those fees can average around as much as 9%. In extreme cases, it can even be the majority of a bank's profit. Either way, banks of all sizes have found ways to maximize these fees.

VANEK SMITH: One way they did this was by reordering customers' debit transactions. So if someone uses their card multiple times a day, the bank might process the most expensive purchases first, so the account would run into the negative more quickly.

MA: And if you're wondering, can they do that, well, it's not necessarily illegal.

VANEK SMITH: You know, a lot of banks have done this, but Wells Fargo was in fact the subject of a big class action lawsuit over this practice.

MA: Another tactic some banks used was misleading customers into thinking they had to agree to these overdraft rules in order to open a checking account, right? So these customers didn't know they could just ask the bank to stop a payment that would overdraw their account. And this made so much money for one Midwest bank called TCF National that, according to a lawsuit, the CEO named his boat Overdraft.

VANEK SMITH: So this is what was happening on the side of the banks and boats. But what about customers?

WU: Even though the original practice of allowing bounced checks to overdraw an account was supposed to help the most favored customers, the explosion of overdraft fees has ended up hurting the most vulnerable customers - lower-income customers, younger customers and most especially Black and brown customers.

MA: Another federal study found less than 10% of consumer bank accounts incurred 80% of all overdraft fees. And it's not always an accident. Some people overdraw their accounts intentionally.

WU: These folks - they are cash-strapped, and they struggle. They just don't have enough money to make it to the end of the week. As another consumer advocate once put it to me, they have too much month left at the end of the paycheck.

VANEK SMITH: So for some people, overdrafting has essentially become a form of credit. But it is really expensive credit, right? I mean, if you overdraw your account buying a $5 coffee and get hit with a $35 fee, that is a very expensive coffee.

MA: Yeah. I mean, that's, like, a 700% interest rate. But now is probably a good place to mention that the Consumer Financial Protection Bureau recently promised to crack down on aggressive overdraft fees. And that's probably a factor in why some banks are shifting away from this practice.

VANEK SMITH: But Chi Chi says overdraft fees might not have become such a big issue if financial regulators had passed stronger limits on them years ago. She says policymakers could do something similar to the 2009 Credit Card Act.

WU: Over limit fees on credit cards - they used to be a huge problem. Like, people were screaming mad about them.

MA: Credit card companies used to slap people with these fees whenever they went over their credit limit. But the Credit Card Act said companies can only do this if people opt in. And even then, the fees have to be reasonable.

WU: You know what? We don't have over-the-limit fees on credit cards anymore.

MA: Because of this change in the law, over limit fees virtually disappeared.

VANEK SMITH: And Chi Chi says she hopes that overdraft fees will be next.

MA: I could've really used this in college, I've just got to say.

VANEK SMITH: The $35 burrito.

Today's show was produced by Nicky Ouellet with help from Isaac Rodrigues. It was fact-checked by Corey Bridges. Viet Le is our senior producer, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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