Capital One (COF) stated on Wednesday that it will abolish overdraft charges at the beginning of the next year, making it the biggest bank to waive fees that cost Americans — particularly the financially weak — billions of dollars each year.
The decision comes after the head of the government's consumer watchdog pledged to target the charges that account for two-thirds of the bank's fee and commission income.
The Virginia-based bank clients participating in overdraft protection will be transferred to commission-free bank overdraft in the beginning 2022. For those who are not engaged in the overdraft protection system, any transaction that could result in an overdraft from the account will be refused and will not be subject to a fee. Clients can apply for overdraft protection at any time.
Richard Fairbank, CEO of Capital One, stated that a bank account is the basis of a person's financial life. It is how people get paid, pay their debts, and handle their assets. Overdraft protection is a useful and practical option that may offer vital safeguard for families, and that it is very thrilling to provide this service free of charge.
Capital One is the sixth largest biggest bank in the United States and the only one in the top ten to get rid of overdraft charges. Small banks have been at the forefront of the anti overdraft commission trend so far this year, retooling their policies or eliminating charges.
For example, Ally (ALLY) announced in June that it will no longer charge overdraft fees, while Synovus Financial stated in June that it would rely less on such fees for its checking accounts. PNC, TD Bank, Fifth Third, Huntington Bancshares, and Regions Financial all reduced overdraft costs earlier this year by introducing new low-fee accounts or services or restricting when charges are levied.
Others, such as digital bank Dave, are attracting clients with a no-fee strategy.
Capital One's decision comes with Consumer Financial Protection Bureau (CFPB) statistics released on Wednesday, which revealed that banks depend largely on overdraft and non-sufficient funds (NSF) earnings, which reached about $15.47 billion in 2019. JPMorgan Chase, Wells Fargo, and Bank of America contributed for 34% of that sum and 44% of the $5.3 billion earned by banks with shares over $1 billion in 2019.
CFPB Director Rohit Chopra stated that they will take steps to reintroduce genuine competition into the banking sector as a lot of banks have gotten addicted to overdraft fees to maintain their revenues, rather than trying to compete on excellent service and affordable interest rates.
On the legislative stage, Democrats are promoting the Overdraft Protection Act, which would prohibit financial companies from rearranging transactions to maximize costs and restrict overdraft fees to one per month or six per year.
Previous CFPB study found that less than 9% of accounts pay 10 or more overdrafts per year, which results in approximately 80% of total overdraft income. The burden is borne primarily by low- and middle-income Americans, who are disproportionately black and Hispanic, as the Financial Health Network's FinHealth Spend Spend Report showed.
As Mike Calhoun, president of the Center for Responsible Lending (CRL) stated, "those who are most commonly charged overdraft fees are those who can least pay them. The high expense of frequent overdraft charges is a major reason for customers leaving the banking system. Families with paycheck-to-paycheck will find it easier to sleep knowing they won't have to pay commissions if they inadvertently recalculate their invoices”.
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