Capital One plans to scrap overdraft fees

Capital One Financial plans to end overdraft fees for all customers early next year, making it the biggest bank to eliminate the heavily scrutinized income stream.

Many banks have taken steps in recent months designed to help customers avoid overdraft fees, but McLean, Virginia-based Capital One is the just the second bank to jettison them entirely. Detroit-based Ally Financial made a similar announcement in June.

The move is “another step in our effort to bring ingenuity, simplicity and humanity to banking,” Richard Fairbank, founder and CEO of the $425 billion-asset bank, said in a press release.

“By making changes to our overdraft policy,” Capital One said in a statement, “we are providing customers with an opportunity to better manage their cash flow and course correct when necessary.”

Paul Taggart/Bloomberg

“Overdraft protection is a valuable and convenient feature and can be an important safety net for families. We are excited to offer this service for free.”

Capital One’s announcement drew immediate praise from consumer advocacy groups. In a statement, Lauren Saunders, associate director of the National Consumer Law Center, called it a “landmark moment for American families.”

Overdraft fees are facing increased scrutiny from Biden-era regulators, particularly at the Consumer Financial Protection Bureau, as well as competitive pressure from neobanks that eschew the charges. The CFPB said Wednesday that while overdraft fee income across the banking industry dropped during the pandemic, many practices meant to harvest fees from customers have persisted.

In 2019, banks collected nearly $15.5 billion in revenue from fees for overdrafts and non-sufficient funds, with JPMorgan Chase, Wells Fargo and Bank of America accounting for 44% of the total reported that year by banks with more than $1 billion in assets, according to the CFPB.

Mike Calhoun, president of the Center for Responsible Lending, encouraged federal regulators to take action on overdraft fees, while also calling on other banks to follow Capital One’s example.

“Families living paycheck-to-paycheck who bank with Capital One will sleep easier knowing they will not be hit with fees if they inadvertently overdraw their account,” Calhoun said Wednesday in a statement.

Overdraft fee income at Capital One was substantially below other big banks in 2019, according to an analysis from the Center for Responsible Lending. About 2.4% of the company’s noninterest income came from overdrafts, compared to 5.9% for the top 20 banks included in the study.

Customers who are currently part of Capital One’s overdraft coverage program will be automatically enrolled into free overdrafts when the option becomes available in early 2022, the bank said. Those who have opted out of overdraft capabilities will be able to enroll into the free service.

Customers who do not enroll in the program will no longer be able to overdraw their accounts. Capital One will instead decline any purchases that would lead to a negative balance, though it plans to do so without charging a fee.

Capital One customers will need to pay back the amount of money that took their account into a negative balance, and the bank will set a limit on how much its customers can overdraft. Those limits will be based on customers’ deposit histories and risk profiles.

“By making changes to our overdraft policy,” Capital One said in a statement, “we are providing customers with an opportunity to better manage their cash flow and course correct when necessary.”

Banks that seem likely to lose some overdraft fee revenue as a result of recently announced policy changes include PNC Financial Services Group, TD Bank, Fifth Third Bancorp, Huntington Bancshares and Regions Bank.

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