Are the days of overdraft fees nearly over?

Feared bank fees are falling, even as the proportion of households paying them remains the same, new financial research shows. And banks are increasingly offering their customers alternatives such as small installment loans.

Banks charge overdraft fees to cover shortfalls when customers spend more than the amount in their checking accounts. (Banks can also charge “insufficient funds” fees as a penalty when they let a payment bounce.) Once offered as a courtesy, overdrafts have become a lucrative source of bank income.

But for various reasons, including pressure from regulators, banks are backing away from charging fees. Last year, bank income from overdrafts and similar fees fell an estimated 6 percent to $9.9 billion from 2021 and remains “well below” pre-pandemic levels of about $15.5 billion, according to estimates. message from the Financial Health Network, a nonprofit focused on financial stability.

Typical overdraft fee is $15, half of what it was two years ago, according to Moebs Services, a financial research firm. (Its calculation is based on more than 3,600 institutions, including banks, credit unions and financial technology companies.)

Experts say several factors in addition to scrutiny from financial regulators, they are behind the decline, including consumer backlash and competition from new digital money tools. The Office for Financial Protection of Consumers researched fees for financial and other services and is considering updating overdraft rules, leading some banks to make changes.

Other steps banks are taking to ease the burden of overdraft fees include giving customers a one-day “grace period” to cover the shortfall before being charged; fee waivers for small overdrafts, such as $5 or $10 overspending; and limiting the number of overdraft fees that can be charged in one day.

“The changes over the past two years have been big and positive for consumers,” said Alex Horowitz, project director of consumer finance at the Pew Charitable Trusts.

While the downward trend is welcome, the share of households with checking accounts that reported paying overdraft fees last year remained unchanged at 17 percent from 2021, said Meghan Greene, senior director of policy and research at the Financial Health Network.

Banks still collected nearly $10 billion in overdraft fees last year, mostly from “people who are struggling financially,” she said. (The network’s estimates of bank overdraft revenue differ from the Consumer Financial Protection Bureau’s numbers because, he said, the bureau’s data reflects banks with more than $1 billion in assets, while the network also includes data from small banks and credit unions.)

Financially vulnerable households — those who have trouble paying bills on time, saving for emergencies and managing debt — are far more likely to pay fees, the network found. Nearly half of these households reported paying overdraft fees last year, compared to just 4 percent of financially sound households.

Vulnerable households, which are disproportionately black and Latino, are also more likely to report paying more than 10 overdraft fees. Frequent overdrafters are much more likely to say their last overdraft was intentional — meaning they knew they didn’t have enough funds to cover the payment but made it anyway.

“They have very few other options,” Ms Greene said.

According to her, these consumers are under financial pressure from other sources as well. Network data is full Overview of FinHealth expenses, released Friday, found that total interest and fees on credit card balances rose more than 20 percent to an estimated $113.1 billion last year due to higher card balances and higher interest rates. Nearly half of financially vulnerable cardholders have credit card debt of more than $5,000, Ms. Greene said, meaning higher rates add to the burden on people who are already struggling.

The network’s annual report and overdraft information is based on data from public banks and a January survey of more than 5,000 household finance decision makers.

Here are some questions and answers about overdraft fees:

Which banks have abolished overdraft fees?

Many large institutions have abolished insufficient funds fees, and some banks no longer charge overdraft fees, including Citi, Ally Bank, Capital One and Alliant Credit Union. Other banks that have made changes include American bankwhich last year cut overdraft fees to $10 from $35.

Some banks no longer allow customers to spend more than they have in their accounts, but refuse payments that exceed the account balance. Others generally allow overdrafts, but also offer special accounts that don’t offer this service for customers who prefer to avoid potential fees.

The consumer office monitors the bank overdraft policies on its website and financial pages as Bankrate.com also offer lists.

Does the overdraft service have any advantages?

Some people may want what banks call “overdraft protection” to ensure that important bills are paid even if the account falls below the required balance. Customers must opt-in to overdraft for debit and ATM withdrawals. But banks don’t need your permission to charge overdraft fees for online payments or checks instead of letting them bounce.

Consumers have another option. They can link a savings account or line of credit to their checking accounts so funds are automatically transferred when needed, preventing overdrafts. Some banks charge a fee when you use backup funds, but many have also eliminated such “transfer” fees.

Are there cheap alternatives for people who need a short-term loan?

More and more banks are now offering automated small loans to their customers. Such loans are offered by six of the eight largest banks (by number of branches) and seven large credit unions Pew. (Increased availability is partly due to the guidelines issued financial regulators in 2020.)

Loans range from $5 to $1,000 depending on the bank and can go far cheaper than relying on repeated overdrafts or borrowing from other sources such as payday lenders, Pew found. For example, a $400 three-month loan from a payday lender typically costs $360 in fees, while banks charge $24 or less for a loan of the same amount, Pew said.

The loans are considered safer because they are repaid in installments over several months instead of one balloon payment. Some banks approve borrowers based on their transaction history rather than their credit score, so customers with low scores who may not qualify for traditional loans may benefit.

Another option: an “access to earned wage” application. The apps help workers avoid overdrafts by giving them early access to a portion of their paychecks to pay bills, said Todd J. Zywicki, a professor at George Mason University Law School and a research fellow at the university’s Law and Economics Center. “I’m a fan,” he said.

But some consumer advocates advise caution because some apps may charge fees for quick money delivery, they said. Some encourage users to pay optional fees based on a percentage of the deposit.