Consumer Financial Protection Bureau called out banks for relying on overdraft fees to generate huge profits.
Capital One has become the first big bank to remove overdraft charges, providing relief to its customers. Overdraft charges have been a huge source of income for banks at the expense of their cash-strapped customers but now, banks are eliminating the charges after being heavily criticized for the same. "The bank account is a cornerstone of a person's financial life," said Capital One CEO Richard Fairbank. "Overdraft protection is a valuable and convenient feature and can be an important safety net for families." The announcement made on Wednesday confirmed that the bank was removing all fees for overdrafts and non-sufficient funds, becoming the first big bank to do so, reported CNN Business.
Capital One said it will continue to allow customers to get free overdraft protection on their accounts. Capital One's decision comes on the heels of small banks such as Ally and financial firm Alliant recently eliminating overdraft fees. Advocacy groups are hoping other big banks follow suit as well. "This move by Capital One will have tremendous benefits for the most vulnerable consumers," said Lauren Saunders, associate director of the National Consumer Law Center. "It's critical we keep working to make the banking system more inclusive and fair for all."
According to the Consumer Financial Protection Bureau, banks made close to $15.5 billion in overdraft fees alone in 2019. CFPB stated that banks were relying on overdraft fees to generate profit instead of investing in improving services. "Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model," said CFPB Director Rohit Chopra. "We will be taking action to restore meaningful competition to this market." Three banks — JPMorgan Chase, Wells Fargo, and Bank of America — brought in 44% of the total reported that year by big banks. The agency also announced that it was increasing oversight of banks with a heavy reliance on overdraft fees for revenue. Experts believe other big banks could eliminate overdraft fees to avoid CFPB enforcement actions. "The CFPB will be enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees," the agency said in a statement.
Senator Elizabeth Warren singled out JP Morgan Chase (JPM) CEO Jamie Dimon as "the star of the overdraft show," reported CBS News. Earlier this year, during a hearing held by the Senate Banking Committee, Warren quizzed the chief executives of Citigroup, Bank of America, JPMorgan Chase and Wells Fargo on why they didn't waive overdraft fees for customers last year despite being offered their own protections from the Federal Reserve during the pandemic. "Over the past year, you could've passed on the breaks that you got from the Fed to your customers, but you didn't do it," Warren told the CEOs. "No matter how you try to spin it, this past year has shown that corporate profits are more important to your bank than offering just a little help to struggling families, even when we are in the middle of a worldwide crisis."
Capital One is completely eliminating overdraft fees, a move will cost the bank ~$150 million in lost revenue per year.— Morning Brew ☕️ (@MorningBrew) December 1, 2021
It used to charge customers $35 overdraft fees, capped at four such fees per day, or up to $140 daily.
When JP Morgan Chase CEO said Warren was citing wrong figures, she reminded him that JP Morgan collected more than seven times as much money in overdraft fees per account than their competitors. "You and your colleagues come in today to talk about how you stepped up and took care of customers during a pandemic, and it's a bunch of baloney," she said.
In August, Senators Elizabeth Warren and Cory Booker reintroduced legislation to crack down on exploitative overdraft fees. "While the COVID-19 pandemic has swept across the country and millions of families have struggled financially, big banks have reaped in billions of profits made from overdraft fees," said Senator Warren at the time. “Exploitative and excessive overdraft fees allow banks to reap enormous profits at the expense of the most economically vulnerable people,” said Senator Booker. "Families emerging from this crisis cannot continue to be saddled by these burdensome and abusive practices."