Capital One Eliminates Overdraft Fees: Who's Next?

Capital One has eliminated overdraft fees and non-sufficient fund fees for all of its consumer banking customers, making it the first major U.S. bank to do so.

It joins a list of smaller financial institutions that have already ditched overdraft fees and the question is now, will more big banks follow suit?

No More Overdraft Fees at Capital One

Capital One is not the first bank or credit union to eliminate overdraft fees, a long-standing practice that disproportionately affects people who can't afford them.

Earlier this year, online banking giant Ally Bank made headlines for eliminating its overdraft fees, and Alliant Credit Union, another major financial institution, followed shortly after.

Capital One is different from Ally and Alliant, however, because of its sheer size and actual physical locations. Capital One is the nation's sixth largest retail bank and, as of now, the only one in the top 10 to eliminate overdraft and NSF fees.

Three of those top 10 banks, according to the Consumer Financial Protection Bureau, were responsible for 44% of the $15.47 billion in overdraft revenue collected in 2019. Those three banks are JPMorgan Chase, Wells Fargo and Bank of America.

Why the Change?

'This is an important mission moment at Capital One. We are making this choice to help our customers succeed. And along the way we are changing banking for good,' wrote Richard Fairbank, Capital One's Founder and CEO, in a memo sent on Dec. 1 to 'All Capital One Associates. The memo was provided to The Penny Hoarder by Capital One's public relations department.

Capital One reports that this will cost the bank more than $150 million in annual revenue.

'Over the years we have taken our own path,' Fairbank wrote to employees. 'We have capped fees, waived fees, and introduced grace periods for consumers to turn their balances positive before fees are assessed. Our fee levels are at the far low end of the industry. But we aren't done yet. We are going to zero.'

And though Capital One is losing serious revenue by trending toward no fees, some experts think it makes financial sense. 

'Their array of financial services skews heavily towards credit cards, which are a great source of revenue in the form of interest rates and fees,' said Ann Martin, Director of Operations at CreditDonkey. 'By eliminating overdraft fees for their banking products, they will be able to bring in more consumers, many of whom can then be set up with Capital One credit cards, replacing any lost revenue from overdraft fees.'

Overdraft Protection Still Offered

Capital One customers can still opt in to overdraft protection. This will prevent their debit cards from being declined or their checks bouncing if they spend more than they have in their checking accounts.

The difference now is that this service is free of fees. If you are a Capital One customer, make sure you have opted into this fee-free service to protect against important bills (like rent or utilities) not getting paid because of insufficient funds.

That said, Capital One customers will have to demonstrate that they can manage recurring deposits before being eligible for the program.

Banks and Credit Unions That Don't Charge Overdraft Fees

These eight financial institutions â€" banks, credit unions and cash management services â€" do not levy overdraft fees:

• Ally
• Alliant Credit Union
• Capital One
• Betterment *
• Axos
• Discover
• Fidelity*
• KeyBank**

*Fidelity's account is a cash management account, which is slightly different from a traditional checking account and is built for those using Fidelity to invest. Betterment is also a cash management service which offers investing programs and a mobile-first checking account. 

**KeyBank's overdraft protection for its Hassle-Free Account results in a declined transaction. No fees, but also declined payments for things like rent and utilities can still result in late fees for those struggling with finances.

Some large banks, including Wells Fargo, Chase and Bank of America, do offer specific accounts without overdraft fees, but the accounts are lackluster in terms of offerings and charge monthly maintenance fees. 

Looking for a new checking account? We've got recommendations for the best checking accounts at banks and credit unions.

The Future of Overdraft Fees

In recent years, rather than eliminate overdraft fees outright, some banks have introduced policies and safeguards that make it more difficult for customers to overdraft and/or a lot easier to waive the fees if they do.

For example, PNC now has a Low Cash Mode while online bank Chime offers fee-free overdraft with SpotMe, up to $200. Features like 24-hour grace periods are becoming the norm across the board.

But are these tactics enough, especially when other banks are doing away with these fees entirely? Now that Capital One has taken this leap, will other banks follow?

Caleb Red, founder of TheDollarBudget (and Capital One QuickSilver Cash Rewards credit card holder), said he thinks they will.

'To stay competitive and attract new customers, many big banks are likely to follow Capital One and drop overdraft fees,' he told The Penny Hoarder.

Brad Cummis, owner and principal agent at Insurance Geek, agreed 'Other big banks are likely to follow Capital One's example due to competitive pressure rather than social reasons. Customers are likely to transfer their accounts to banks that offer lower interest rates and no fees on transactions such as overdrafts.'

And it doesn't hurt that the Consumer Financial Protection Bureau has vowed increased scrutiny for banks that depend on overdraft fees for revenue. The threat of government regulations may motivate other banks to drop overdraft fees or at least make it easier for customers to avoid them.

Timothy Moore covers bank accounts for The Penny Hoarder from his home base in Cincinnati. He has worked in editing and graphic design for a marketing agency, a global research firm and a major print publication. He covers a variety of other topics, including insurance, taxes, retirement and budgeting and has worked in the field since 2012.

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