Capital One becomes first big bank to ditch overdraft fees

Capital One plans to eliminate overdraft fees early next year, the company announced Wednesday, becoming the largest bank to get rid of the charges that cost Americans — especially financially vulnerable ones — billions of dollars every year.

The move comes as the head of the government’s consumer watchdog vowed to target the fees that make up two-thirds of bank fee revenue.

Capital One (COF) customers who are enrolled in overdraft protection will be automatically converted to the bank’s no-fee overdraft in early 2022. For those who are not enrolled in overdraft protection, any transactions that would overdraw an account will be declined and assessed no fees. Customers can enroll in overdraft protection at any time.

“The bank account is a cornerstone of a person’s financial life,“ Capital One Founder and CEO Richard Fairbank said in a statement. “It is how people receive their paycheck, pay their bills and manage their finances. Overdraft protection is a valuable and convenient feature and can be an important safety net for families. We are excited to offer this service for free.”

NEW YORK, NY - JULY 30: A man uses the ATM at a Capital One bank in Midtown Manhattan on July 30, 2019 in New York City. In one of the largest-ever thefts of bank data, a software engineer in Seattle was arrested for hacking into a Capitol One server and obtaining the personal data of over 100 million people. The data includes social security numbers, bank account numbers, names, addresses, credit scores, credit limits, balances, and other information. (Photo by Drew Angerer/Getty Images)
A man uses the ATM at a Capital One bank in Midtown Manhattan on July 30, 2019 in New York City. (Photo by Drew Angerer/Getty Images) (Drew Angerer via Getty Images)

Capital One is the sixth largest bank and the only one in the top 10 to eliminate overdraft fees. Smaller banks so far have been on the forefront of the overdraft movement this year, retooling their policies or dropping the fees altogether.


For instance, Ally (ALLY) announced in June it was eliminating overdraft fees, while Synovus Financial said in June it wants to rely less on those fees for its checking accounts. PNC, TD Bank, Fifth Third, Huntington Bancshares, and Regions Financial all earlier this year curbed overdraft fees by offering new low-fee accounts or services or limiting when fees are charged.

Others, like digital bank Dave, are using a no-fee model as a way to attract customers.

"We're going after the biggest pain point we found for customers in this country, which was overdraft," Dave CEO Jason Wilk recently told Yahoo Finance Live. "We decided that was completely unfair for customers.”

Capital One’s announcement coincides with a report Wednesday from the Consumer Financial Protection Bureau (CFPB) that showed banks heavily rely on overdraft and non-sufficient funds (NSF) revenue, which totaled an estimated $15.47 billion in 2019. JPMorgan Chase, Wells Fargo, and Bank of America brought in 34% of that total and 44% of the $5.3 billion brought in by banks with assets over $1 billion in 2019.

Pretty young mom carrying lovely little girl using an automatic teller machine together in the train station
(Photo: Getty Creative) (Images By Tang Ming Tung via Getty Images)

“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” CFPB Director Rohit Chopra said in a statement. “We will be taking action to restore meaningful competition to this market.”

On the legislative front, Democrats are also pushing the Overdraft Protection Act, which would ban institutions from reordering transactions to increase fees and limit overdraft charges to one a month or six a year.

Previous CFPB research found that less than 9% of accounts pay 10 or more overdrafts per year, which account for nearly 80% of all overdraft revenue. The burden is largely shouldered by low- to moderate-income Americans who are disproportionately Black and Hispanic, according to Financial Health Network’s FinHealth Spend Report, with $7.3 billion paid by low- to moderate-income households.

“The people who are most frequently charged overdraft are the people who can least afford it. The high cost of repeat overdraft fees is a leading cause of people being pushed out of the banking system,” Mike Calhoun, president of the Center for Responsible Lending (CRL), a consumer advocacy group, said in an emailed statement. “Families living paycheck-to-paycheck who bank with Capital One will sleep easier knowing they will not be hit with fees if they inadvertently overdraw their account.”

Janna is an editor for Yahoo Money and Cashay. Follow her on Twitter @JannaHerron.

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