Ally Bank kills hated overdraft fees – huge money generator for banks
Ally Financial (ALLY), after testing a no overdraft banking model, makes it permanent. This ruling applies to all types of accounts, including checking and savings accounts, and there are no requirements or restrictions.
In April 2020, Ally began waiving overdraft fees, citing the challenges of the coronavirus pandemic that many customers have faced. On June 2, Ally said he was eliminating this fee for good.
“Overdraft fees are a pain point for many consumers, but are particularly onerous for some. It’s time to end it, ”CEO Jeffrey Brown said in a press release. The fee was previously $ 25, although Ally said they never bill a customer more than one per day and the company gave a grace amount of $ 10 before billing.
“Other banks say they’ve eliminated overdraft fees, but that’s because they don’t allow overdrafts,” Ally spokesman Justin Nicolette told Yahoo Finance in a report. E-mail. Other banks offer “protection” that allows funds to be transferred from a savings account to cover the transaction. The complete elimination of fees is rare: notably, Discover Financial eliminated them in 2019.
Overdraft fees are a huge money generator for banks and credit unions. Estimates differ, but each year approximately $ 34 billion is deducted from overdraft accounts, often some of the most vulnerable bank customers who unknowingly sign up so that the transaction happens with a fee rather than being refused. According to the Center for Responsible Lending, whose calculations found a different (but still very high) number of charges at around $ 12 billion. The typical overdraft fee is $ 35, while the cost of a bank overdraft is “very low.”
“Nationally, more than 80% of overdraft fees are paid by consumers living paycheck to paycheck or with consistently low balances – precisely the people who need help stabilizing their finances.” Brown said. “Eliminating these fees helps prevent people falling further behind and feeling penalized when they catch up.”
According to a report cited by Ally, 95% of people who paid overdraft fees in 2020 were financially vulnerable and “disproportionately black and Latin,” Ally noted.
If a person overdrafts their account, they have a few days to put in the funds to continue using the account for withdrawals. Customers have even more time to prepare before the account is closed. Ally told Yahoo Finance that 97% of negative balances “are corrected within 30 days. For many customers, this flexibility is a big deal.
For Ally, overdraft fees have never been a major driver of income, which has enabled online banking to make this move. But as a big money maker for the industry, this move can put pressure on others.
As of October 2019, TD Ameritrade, Schwab and other major brokerages stopped charging commissions to trade stocks after Robinhood at no cost has gained enough strength in the market.
Going forward, a question is whether this development in the banking industry may have a similar domino effect in day-to-day banking operations. Banking, like commerce, is computerized and cheap, and the fees that were there to offset the costs now exist simply by inertia. Banks like Ally that don’t have minimum balance requirements, maintenance fees, ACH transfer fees, and free ATM withdrawals could push the industry in a new, more user-friendly direction.