Earlier this week, Capital Onejoined a growing number of banks eliminating all overdraft and non-sufficient fund (NSF) fees for customers.
That's good news for consumers. Overdraft fees are considered a "convenience" for customers, ensuring that their purchases aren't declined. But they've turned into money-making machines for banks, who collected $15.47 billion in 2019 — almost two-thirds of their reported fee revenue for the year, according to the Consumer Financial Protection Bureau (CFPB).
The fees hit a record high this year, averaging $33.58 each time someone overdraws their checking account, according to Bankrate's 2021 Checking Account and ATM Fee Study.
Overdraft fees can be especially pernicious because banks can charge them multiple times in one day, depending on how many transactions a consumer makes. Minority customers and those considered financially vulnerable are most likely to be dinged by these fees, reports have found.
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Capital One is the largest bank to nix the fees, but Ally, a popular online bank, announced it was eliminating them earlier this year, and other, smaller, institutions have also scrapped them recently. More banks are likely to follow suit, says Ken Tumin, founder and editor of DepositAccounts.com.
That's in part because they don't want to lose out on the competitive edge the elimination of the fees might give to banks like Capital One and online-only banks like Chime that have long levied no overdraft fees, says Tumin. But it's also because the CFPB announced this week it will more intensely scrutinize banks that are "heavily dependent on overdraft fees."
"They might see the writing on the wall," says Tumin. "They are being proactive on overdraft fees and coming out with new policies."
Other banking fees may increase
In place of the $35 fee, Capital One will offer free overdraft protection starting in 2022, which customers can opt out of. Customers will need to have steady deposits to qualify for the fee-free service, CNBC reported.
Other banks have made similar moves in recent years. Ally and Chase, for example, have long allowed customers to transfer money from their savings account to their checking account to cover any overdrafts for free.
Tumin says alternative practices like this will become more popular. Banks may start giving customers a grace period of a day or two to transfer funds if they overdraw before penalizing them or increase how much customers must overdraft by before incurring a fee.
"It's not outright elimination, but it is more customer-friendly," he says.
However, they will also likely start increasing other types of fees to make up for the lost revenue of overdraft fees.
It is likely monthly maintenance fees might increase, Tumin says, or that they may require larger monthly direct deposits than they currently do in order to avoid the fee. He also expects more banks to institute fees on things like paper statements.
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