Bank Overdraft Fees News and Analysis

Research shows that more and more consumers are moving away from cash, and maybe that’s a good thing. Just make sure there’s enough money in your account to cover those debit charges.

An annual survey from Bankrate shows out of network ATM fees are going up, along with overdraft fees.

The survey found the average overdraft fee is now $33.36, slightly higher than last year and close to the peak reached in 2017.

Using another bank’s ATM is getting more expensive as well. Average ATM fees are getting close to $5, another reason for consumers to use their debit cards for nearly all purchases -- just as long as they have a healthy balance in their account.

For consumers who like to pay with cash, the cost of getting money from an out of network ATM is getting pricey. The survey puts the average ATM surcharge at $3.09, going up for the 15th straight year. The increase is 2 percent higher than in 2018.

Overdraft fees are rising

Overdrawing checking accounts is also more expensive than it once was. Banks have raised the average overdraft fee for the 19th time in the past 21 years.

If you hope to earn a little interest on your checking account, banks now require a larger minimum balance in order to avoid paying fees. Adding insult to injury, the average interest rate on these accounts went down this year.

While U.S. banks have not adopted the negative interest rates found in several European nations, they appear to be moving in that direction. Fees charged on interest-bearing accounts rose to an average of $15.05 this year, more than twice the amount consumers pay on checking accounts that don’t collect interest.

Fees for keeping accounts open

The survey found that several banks charge a fee for consumers to keep their accounts open, especially if their balance falls below the minimum requirement. 

Quite a few banks charge customers for keeping their accounts open, especially if they fail to meet a minimum balance requirement. Interest-bearing checking accounts now require an average balance of $7,123 -- the largest in nearly 20 years.

It also takes more money now to open an account. For an account paying interest the average bank requires nearly $575. If the account doesn’t pay interest you can get away with an average of $163.

Now that more checking accounts are “free,” meaning they have no monthly service fees or balance requirements, Bakrate says you may be better off opting for an account that doesn’t require you to deposit too much money and opening a high-yield savings account or money market account.

An analysis by personal finance site NerdWallet found the average consumer with a checking account paid nearly $1,000 in fees over a 10-year period. Most of that could have been avoided, the company says, if customers had chosen the most consumer-friendly bank account.

Three fees tended to hit consumers the hardest – monthly maintenance fees, ATM and account use fees, and overdraft and nonsufficient funds fees.

“Checking accounts are the keystone of American personal finance,” said Sean McQuay, credit and banking expert at NerdWallet. “My checking account is the center of my financial life. That’s where all my money goes in and out, so I need to trust my bank.”

There are ways to avoid these fees. The easiest to avoid is the monthly maintenance fee, which can be $10 to $12 at the nation's largest banks. That's $120 or more a year.

There is no reason to pay this fee, which is usually placed on a bank's most basic checking account. By doing a little research, you should be able to find a checking account that not only does not charge a monthly fee, but pays you interest on the balance.

Things you might have to do

These accounts usually require things on your part – perhaps maintaining a minimum balance, a certain number of debit transactions each month, and a direct deposit. With a little planning, most checking account customers should be able to manage these requirements.

The second set of fees, ATM fees, can be avoided by only using your bank network's ATMs. But again, having the right kind of checking account can help as well.

Some rewards checking accounts, offered primarily at credit unions, online banks, and small community banks, offer a set of perks that includes reimbursement of ATM fees. ATM fees can also be avoided by always withdrawing extra cash when making a debit card purchase at the supermarket or some other retail location that allows cash back.

Do not opt in

Overdraft fees can be avoided a couple of ways. First, do not “opt in” for overdraft “protection” from your bank. You bank wants to provide this “service” to you, covering any purchase you make with insufficient funds. However, it will charge you an average of $34 for this service, in the form of an overdraft fee.

That will protect you against overdrafts on debit purchases, but a bounced check will still carry a fee. To avoid bouncing a check, consider keeping your savings in your rewards checking account to pad your balance. Most rewards checking accounts pay a higher interest rate than a passbook savings account. If you do this, however, you'll need to keep careful track of your spending to make sure you don't eat into your savings.

The NerdWallet analysis shows using the most consumer-friendly checking accounts cost consumers just $31 a year, and that's if they have a couple of overdrafts per year, which can be avoided. If all consumers switched to the best free checking accounts available, they could save a total of more than $7 billion a year.

Recently implemented banking regulations have cut down on bank overdraft charges. Now if you make a debit card purchase without sufficient funds in your account, the transaction is denied, unless you have opted-in to the bank's overdraft coverage.

Previously, the transaction always went through. In return for covering your purchase, the bank assessed a fairly hefty fee. If you spent the day shopping, making five or six overdraft purchases, you would get socked with five or six overdraft fees.

But overdraft charges have not disappeared. If you write a check that bounces, you can be certain that you'll pay a fee. And, if for some reason you have agreed to opt-in to the bank's overdraft coverage, you are right back paying overdraft fees for every debit card purchase not covered by adequate funds in your account.

University-bank partnerships

A study by NerdWallet of Consumer Financial Protection Bureau (CFPB) data shows college students tend to pay the most overdraft fees, especially if they have accounts at university-affiliated banks. The study looked at university-affiliated checking accounts at 20 of the largest schools in the country.

It found that when schools partnered with banks, giving preferred access to new customers, students tended to pay for it. Not that the university-affiliated banks provided bad products. The study found the accounts it examined were no worse than the national standard.

Even though the schools are profiting from the arrangement, the authors say it could be argued that banking services on campus are often needed. It's just that students need to be careful.

Paying a steep price

“History tells us that when schools and banks get together to jointly market products like campus checking accounts, credit cards or student loans, students can pay a steep price,” said Seth Frotman, assistant director for the Office for Students and Young Consumers at the CFPB.

The NerdWallet authors have come up with some simple advice. Before signing up for a checking account at the university-affiliated bank – or any bank for that matter – do some investigating.

Find out the amount of the overdraft fee. Is there a limit on the number of overdraft fees that can be charged in a single day? If you do not opt-in for overdraft coverage, can you still incur a fee?

Most banks will encourage you to opt-in for overdraft coverage, but there is really no good reason to do so, and a lot of good reasons not to. Having your purchase declined for insufficient funds is not the worst thing in the world, especially if it spares you a $35 fee.

A new federal law implemented six years ago was supposed to resolve the issue of bank overdraft fees, which often blindsided consumers with unexpected expenses.

Before the law was passed, a consumer making a debit card purchase, and not having sufficient funds to cover the purchase, would be automatically “loaned” the funds to cover the purchase. The bank would then charge the consumer a fee of $30 or so for that service.

The consumer not only had to pay back the money used for the purchase but pay the fee as well. If the consumer made three or four other purchases before becoming aware that he or she was overdrawn, the fees could be well over $100.

Congress passed a law in 2010 that, among other things, required consumers to “opt-in” if they wanted to continue that “service.” Otherwise, if a point of sale debit card purchase would overdraw the account, the purchase would be denied, with no resulting fee.

A new report from the Center for Responsible Lending (CRL) claims abusive overdraft practices in the banking industry are alive and well. It finds that consumers paid nearly $14 billion in overdraft fees last year.

'Overdraft abuses continue'

“CRL’s analysis confirms that overdraft abuses continue, carrying an enormous annual price tag for consumers as a whole, and with devastating effects on individuals,” Peter Smith, a Senior Researcher at CRL and the report’s co-author, said in an email to ConsumerAffairs.

After the new law went into effect, posing a threat to banks' lucrative fee revenue, most banks launched aggressive marketing campaigns to persuade consumers to “opt-in” for overdraft coverage. Many have done so, even though it probably costs them money.

The report claims that some consumers who have not opted in are getting hit with overdraft fees as well. A year ago, the Consumer Financial Protection Bureau (CFPB) fined Regions Bank $7.5 million, saying it levied overdraft fees on thousands of consumers who had not opted-in for overdraft coverage.

The fine was in addition to a consent order requiring the bank to pay back all consumers who had been affected by the unauthorized overdrafts.

Analyzed complaints

For its report, CRL said it analyzed consumer complaints filed with the CFPB and found that even consumers who worked hard to avoid overdrawing their accounts were charged “disproportionately harsh overdraft fees.”

The report also looked at data from the Federal Deposit Insurance Corporation (FDIC) and determined that 778,000 households that once had bank accounts no longer do. The report suggests high or unpredictable fees are a primary reason.

“Financial institutions take advantage of consumers fighting desperately to stay afloat,” said Rebecca Borné, report co-author and CRL Senior Policy Counsel. “CFPB should require that overdraft fees be reasonable and proportional to the cost to the institution, much the same way that credit card penalty fees are regulated.”

CLR goes a step further, saying overdraft fees should be regulated as “extremely high cost credit products,” like payday loans.  

The banking landscape has gotten extremely competitive in recent years, and much of that competition has been coming from online banks, with no brick and mortar locations.

Without that overhead, and the personnel it takes to staff physical locations, online banks are in a position to offer consumers better deals and still be profitable.

Personal finance site WalletHub has studied online banks, choosing what it says are the best checking and savings accounts. What they have in common is an absence of fees and higher rates of interest than you'll find at brick and mortar banks.

Best overall

Earning best overall honors is the Bank of Internet USA Rewards Checking Account. Right off the bat, it earns big points for not charging fees – no monthly fee, no overdraft fee, no insufficient funds fee. It's even free to use ATMs.

Customers can earn a higher rate of interest on their checking account balances, but to earn the highest rate – 1.25% – you have to meet monthly goals, such as making direct deposits and engaging in a certain number of debit card transactions.

WalletHub has identified AmericaNet Rewards Checking as the account with the best interest rate. It pays up to 1.5%, but imposes a number of conditions, such as using your debit card a certain number of times.

There is no monthly maintenance fee, you can open an account with as little as $1, and the bank will reimburse you up to $25 per month for ATM fees.

The Bank5 Connect High-Interest Checking Account takes the honors for the best rewards package.

A rarity

“It’s pretty rare to find rewards in the checking account space these days, as most programs merely provide discounts on certain types of purchases,” the study authors write.

The Bank5 program works like this: you get one point for every $2 that you spend. That works out to about 0.5% cash back when used for gift cards, travel, and merchandise.

Another bonus: the account pays depositors 0.76% APY – admittedly not much, but at least it isn't charging a monthly maintenance fee. There is also a reimbursement of ATM fees up to $15 per month.

The study found 63% of online-only checking accounts do not charge a monthly maintenance fee, an increase from 56% last year. The authors say that works out to an average monthly savings of $10.75.

Years ago consumers opened checking accounts at their local bank and rarely paid a fee, unless they overdrew their account.

Sometimes, even then there might not be a fee. A consumer might get a polite call from the bank manager asking that he or she put some more money in their account. It's a different story today.

The Wall Street Journal reports that the move away from free checking began when regulators clamped down on banks, making it harder to collect debit card fees. Banks are making less money by making fewer loans, with near record low interest rates.

While big banks may offer fee-free checking accounts, they usually have minimum balance requirements that depositors may or may not be able to meet. Fees, in short, make up for a lot of lost bank revenue.

What became of the unconditional, no-fine-print checking account? Has it followed the dodo bird into extinction? Not at all, you just may have to look a little harder to find it.

Look for a small bank

If you live in a small town, it's a pretty easy task since most small, community banks still offer free checking with no or minimal balance requirements. Even some larger regional banks offer the same thing.

First Citizens Bank, which operates in 200 markets with 571 branches, offers free checking. There's no monthly fee and no minimum balance requirement. It takes just $50 to open an account. If you'll look around your community, you can probably find a bank that offers something similar.

There are also online options that are available no matter where you happen to live. Here are three worth considering:

Ally Bank

Ally Bank's Interest Checking Account not only doesn't charge for checking, it pays you. You earn a small amount of interest on your balance, which admittedly won't make you rich, but at least they're paying you instead of the other way around.

There is no monthly maintenance fee and customers have free use of Allpoint ATMs. Out of network ATM fees are refunded each statement cycle, up to $10 – another nice feature.

Capital One 360

Another online option is Capital One 360. Again, there are no monthly fees and you earn a small bit of interest in your checking account. It also gives you fee-free access to Allpoint and Capital One ATMs.

USAA

For consumers in the military, or veterans and their families, USAA offers a wide range of financial services, including a free checking account. The account does not levy a monthly service fee and carries no minimum balance requirement. It offers free direct deposits, free transfers and bill pay, and free use of ATMs nationwide.

Checking account fees at banks that do charge them might not sound very high at $5 to $10 a month, but they add up over time – and they are completely unnecessary for consumers who shop around.

With interest rates near 0%, consumers understandably are reluctant to deposit their money in banks, looking for a higher rate of return elsewhere.

With fees on checking accounts meeting stiff resistance from consumers, who are finding alternatives at credit unions, community banks, and online-only banks, many banks are looking for income where they can find it.

One place is ATM fees. According to Bankrate.com's 18th annual checking survey, the average fee for using an out-of-network ATM rose 4% over the past year to a record $4.52 per transaction. The average fee has risen 21% over the past five years.

The numbers in the survey reflect both the ATM fees charged by the ATM operator and those charged by the consumer’s own financial institution.

Pricey ATMs in Atlanta

Naturally, the fees aren't the same everywhere. The survey found they were highest in Atlanta – $5.15 – edging out New York's average of $5.05.

While San Francisco can be a very expensive city, that doesn't extend to its ATMs. San Francisco's ATM fee averages $3.85 in San Francisco, a penny less than Cincinnati.

ATMs aren't the only area where banks are raising fees. The survey found the average overdraft fee rose to a record high $33.07, up 9% since 2010. Milwaukee has the nation’s highest average overdraft fee – $34.79 – and San Francisco again has the lowest, at $30.35.

Avoidable fees

“The most important thing for consumers to know is that all of these fees are completely avoidable,” said Greg McBride, Bankrate.com’s chief financial analyst. “Shop around for a bank or credit union that fits your lifestyle so that you can keep more of your hard-earned cash.”

You might have to look a little harder. Bankrate says 37% of non-interest checking accounts are completely free, the lowest percentage since Bankrate.com began these annual surveys in 1998.

Free checking accounts peaked in 2009, when 76% of checking accounts had no fees.

Your best alternatives when it comes to finding free ATM use and free checking are online banks, smaller independent banks, and credit unions.

For example, Ally Bank has no fee to use AllPoint ATMs in the U.S. and will reimburse up to $10 per billing cycle for out of network ATMs. Credit Union policies vary but nearly all have generous ATM reimbursement policies, as well as free checking accounts.

Access to funds

Meanwhile, the False Labeling Complaint Center, which describes itself as a consumer watchdog, said it is conducting an investigation of bank policies regarding access to customers' funds – especially for small business customers.

"We think there is a gigantic problem with banks in the United States of all shapes, and sizes playing games with the check deposits of small to medium sized businesses,” the organization said in a release.

It said it is concerned that small businesses are being denied access to funds received from customers, even after the customer's check has cleared. It said in some cases, small businesses are paying needless fees for insufficient funds.

Bank of America's (BOA) announcement this week that it would close some more of its branches underscores a new reality for the banking industry -- consumers are doing more of their banking business online.

During a conference call to discuss the company's second quarter earnings report, BOA CEO Brian Moynihan mentioned the bank had closed nearly 20% of its branches in the last 5 years, dropping the number from 6,100 to about 4,800. He said more closures would follow, without attaching a number.

BOA is not alone in cutting its overhead. In June Fifth Third Bank announced plans to close 100 branches, the largest branch closing in the bank's history.

Part of an ongoing trend

It's been going on for some time. SNL Financial reports U.S. banks closed a net 1,487 branch locations in 2013, the most since the research firm began collecting the data in 2002.

Industry analysts agree the reason has nothing to do with declining business. In fact, business for banks has never been better. It's just that banks are convinced they no longer need branches because “everyone” is adopting mobile banking.

While mobile banking no doubt is growing by leaps and bounds, this trend will work against consumers who like to conduct their banking business with a human being.

Transformation to smart banking

Traditional branch-based banking practices are undergoing transformation into smart banking, according to Frost & Sullivan, a research firm.

“Banks are now focusing on integration of futuristic technologies and applications to explore new opportunities for higher customer engagement and improving customer experience,” the company said in a recent report, which focused on technology and application innovations that are enabling the transformation.

Each bank's smart or mobile banking system is different but most offer similar functions. BOA's mobile banking lets customers deposit checks from a mobile device, check account balances and send money to just about anyone.

Changing with the customers

During this week's conference call Moynihan said the bank would save money by closing branches but that isn't the only motivation. They're doing it, he said, because customer behavior is changing. The number of BOA's mobile customers has more than doubled in 4 years to 17 million. The company says 13% of the check's deposited in the bank are coming in by mobile.

If you have fewer branches you need fewer employees. BOA has been steadily cutting staff. Although the bank is beefing up its corps of financial advisors, it has cut more than 70,000 jobs since 2011.

For the first time, the Consumer Financial Protection Bureau has taken action against a bank for violating regulations governing bank overdraft fees.

The bureau announced Tuesday that Regions Bank has been fined $7.5 million for charging overdraft fees to thousands of consumers who had not opted-in for overdraft coverage. The fine comes on top of a consent order with the bureau, also announced Monday, requiring the Birmingham, Ala.-based bank to pay back all consumers who had been affected by the unwarranted overdafts.

“Today the CFPB is taking its first enforcement action under the rules that protect consumers against illegal overdraft fees by their banks,” said CFPB Director Richard Cordray. “Regions Bank failed to ask consumers if they wanted overdraft service before charging them fees. In the end, hundreds of thousands of consumers paid at least $49 million in illegal charges. We take the issue of overdraft fees very seriously and will be vigilant about making sure that consumers receive the protections they deserve.”

Regions Bank operates approximately 1,700 retail branches and 2,000 ATMs across 16 states. With more than $119 billion in assets, it is one of the country's largest banks.

First such action

The action taken by the bureau is the first time it has punished a bank for violating overdraft regulations since new federal rules took effect in 2010, part of the Electronic Fund Transfer Act, that prohibited banks and credit unions from charging overdraft fees on ATM and one-time debit card transactions unless consumers affirmatively opted in. If consumers don’t opt-in, banks may decline the transaction, but won’t charge a fee.

The bureau found that Regions bank allowed consumers to link their checking accounts to savings accounts or lines of credit. Once that link was established, funds from the linked account would automatically be transferred to cover a shortage in a consumer’s checking account. But Regions never provided customers with linked accounts an opportunity to opt in for overdraft. Because those consumers had not opted in, Regions could have simply declined ATM or one-time debit card transactions that exceeded the available balance in both the checking and linked accounts. Instead, the bank paid those transactions, tacking on and overdraft fee of $36, in violation of the opt-in rule.

However, Regions Bank had been aware of the issue for some time. According to the bureau, an internal bank review revealed the violation 13 months after the new overdraft rules went into effect. The bureau said that senior executives at the bank were not made aware of the issue for another year after that, at which point they notified the CPFB. In June 2012, the bank reprogrammed its systems to stop charging the unauthorized fees. Then, this past January, the bank discovered more bank accounts that had been charged unauthorized fees.

Regions Ready

The bureau also said that Regions charged overdraft and non-sufficient funds fees with its deposit advance product, called Regions Ready Advance, despite claiming it would not. Specifically, if the bank collected payment from the consumer’s checking account that would cause the consumer’s balance to drop below zero the bank would either cover the transaction and charge an overdraft fee or reject its own transaction and charge a non-sufficient funds fee. At various times from November 2011 until August 2013, the bank charged non-sufficient funds fees and overdraft charges of about $1.9 million to more than 36,000 customers.

Regions Bank voluntarily reimbursed approximately 200,000 consumers a total of nearly $35 million in December 2012 for the illegal overdraft fees discovered then. After the bureau alerted the bank to more affected consumers, Regions returned an additional $12.8 million in December 2013. In January 2015, the bank identified even more affected consumers and is now required to provide them with a full refund. Regions has been ordered to hire an independent consultant to identify all remaining consumers who were charged the illegal fees. Regions will return these fees to consumers, if not already refunded. If the consumers have a current account with the bank, they will receive a credit to their account. For closed or inactive accounts, Regions will send a check to the affected consumers.

The $7.5 million fine the bank has been ordered to pay could have been larger, according to the bureau, which noted the delay in notifiying senior bank officials of the violations. But the bureau credited Regions for making reimbursements to consumers and promptly self-reporting these issues to the Bureau once they were brought to the attention of senior management.