A new proposal from the Biden administration could make sweeping changes to how much banks will be permitted to charge customers for overdraft fees.
President Joe Biden targeted what he dubbed “hidden junk fees” in a statement on Wednesday, outlining a proposal to cap the penalties banks put on clients who overdraft their accounts.
Overdraft fees originated from when paper checks were common and often took several days to clear. As consumers switched to a more paperless economy, such fees have become a significant source of income for big banks.
Research by Bankrate shows that banks charge an average of $26.61 to cover an overdraft, with some institutions charging more than $35. Among the biggest banks in the United States, overdraft fees accounted for $8 billion in revenue in 2023. The Biden administration claimed that these fees tend to impact low-income families living paycheck to paycheck the most.
“For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines,” Biden said in the January 17 statement. “Banks call it a service — I call it exploitation.”
The proposed rule was met with swift backlash from the banking industry, which has come to rely on fees like overdrafts to do business.
“In an effort to score political points, the [Consumer Financial Protection Bureau] is seeking to eliminate a valuable service and push consumers who need overdraft protection into the hands of less-regulated, more-costly alternatives,” said Rob Nichols, president and CEO of the American Bankers Association, according to The Hill.
Both Nichols and Lindsey Johnson, the president and CEO of the Consumer Bankers Association, suggested that banks had already made voluntary efforts to limit overdraft fees, and to require more would end up “freezing innovation and competition,” as the latter said in a statement, per The Hill.
The policies rolled out by larger financial institutions in recent years have included delayed time periods to bring an account into balance.
At the same time, Chuck Bell, advocacy program director at Consumer Reports, noted that bank customers tend to overdraft by small amounts averaging under $26 and typically repay them within three days.
“[P]ut in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate,” said Bell.
The proposal by the Biden administration is to set a standard fee that is equal to the cost borne by the bank to handle the transaction, which would fall between $3 and $14.
