Capital One says it will stop charging overdraft fees and Bank of America is reducing them. These hefty fees hit people with low incomes the hardest.



One of the nation's biggest banks, Capital One, says it will stop charging overdraft fees to all of its customers. These are the fees charged if you overdraw your checking balance, right? And then the bank fronts you the difference for a few days. As NPR's Chris Arnold reports, more banks could be pushed to do the same.

CHRIS ARNOLD, BYLINE: People hate overdraft fees because they seem really unfair. You buy a $2 a cup of coffee, and you get hit with a $35 fee?

LAUREN SAUNDERS: Yeah. Overdraft fees are really one of the most abusive forms of lending the banks engage in.

ARNOLD: That's Lauren Saunders with the National Consumer Law Center. She says when it comes to regular loans, most banks don't charge people outrageously high interest rates.

SAUNDERS: But they do it hidden from view through overdraft fees.

ARNOLD: If you buy a bunch of things with your debit card over a couple of days not realizing your account's out of money, you can suddenly owe hundreds of dollars in fees. But now, Capital One has become the biggest bank to announce that it's ending overdraft fees altogether.

PETER BOYER: We're the sixth largest retail bank in the U.S. And this will affect every checking customer that we have.

ARNOLD: Peter Boyer is a senior vice president at Capital One. He says the bank's millions of customers who already have what banks call overdraft protection will keep getting it, but it'll be free.

BOYER: We recognize that customers have unexpected expenses and needs at times where their cash flows don't quite line up between expenses and income. And we really want to get our consumers to a place where they're living healthy financial lives.

ARNOLD: Capital One is an NPR sponsor. But we cover them like any other company. All U.S. banks together make about $15 billion a year on overdraft fees. But, Lauren Saunders says, the vast majority of that comes from less than 10% of customers who keep getting hit over and over again.

SAUNDERS: These are people who have low balances, are struggling paycheck to paycheck. So in other words, the overdraft fees fall most heavily on the most vulnerable consumers.

ARNOLD: At Capital One, because it's not going to be charging those fees anymore, Boyer says the bank will be taking a hit to its bottom line.

BOYER: So on an annual basis, Capital One is going to forego about $150 million.

ARNOLD: To put that in perspective, Capital One had $28 billion in revenue last year. And the move could, of course, bring in some more customers. Still, you might think, well, maybe the bank's just going to charge customers some other kinds of fees to make up the difference. But Boyer says...

BOYER: No. We are going to eat it because it's the right thing to do. We are not going to try and recoup that revenue elsewhere.

ARNOLD: The free overdraft protection will likely go into effect within a few weeks. To get it, you'll have to make regular deposits. There are limits on how much money you can overdraft by, but no limit on the number of overdrafts. After the fees go away, though, if some customers start overspending all over the place, the bank might tweak the rules. Throughout the industry, overdraft fees are being reconsidered. A smaller online bank, Ally, recently ditched the fees. Some banks have reduced them. Gerard Cassidy is an analyst with RBC Capital Markets.

GERARD CASSIDY: It's a area of focus for many of the banks because of the increased regulatory scrutiny on overdraft fees.

ARNOLD: The Federal Consumer Financial Protection Bureau has recently signaled that it's going to be taking a hard look at banks that are charging these fees. So tougher regulation may be on the way. And Cassidy says more banks will likely decide to get out in front of that by voluntarily ending or reducing the fees. And he says the $15 billion in fees a year that banks bring in this way...

CASSIDY: Generally speaking, it's not a major source of revenue for the banks.

ARNOLD: Lauren Saunders sits on an unpaid consumer advisory board for Capital One. And she says, if anything, it was making more from these fees than some other banks because it has a lot of customers living paycheck to paycheck. So she says if Capital One can do this, other banks can afford to do it, too.

Chris Arnold, NPR News.

(SOUNDBITE OF BILL LAURANCE'S "THE PINES") Transcript provided by NPR, Copyright NPR.