Farewell to overdraft charges?

When they debuted nearly 30 years ago, overdraft charges were meant to provide a cushion for consumers who accidentally withdrew more money than was available in their bank accounts. The bank would cover the deficit and charge the customer a fee to do so, and the customer would avoid bouncing checks or be declined at checkout.

Yet over the years, the practice changed. Overdraft fees became an enormous and controversial source of income for banks, worth billions each year — $20.3 billion in 2020.

The controversy? One involves banks rearranging the order of transactions so that the most expensive ones get processed first. Then, when an account goes into the red, the bank dings the customer with a fee for each subsequent transaction in the negative, no matter how small the purchase. At $35 a pop in some places, the fees can quickly spiral — and can turn a pack of gum into a nightmare.

Consumer watchdogs have suggested a system that alerts consumers to a potential fee at the point of sale, allowing people to opt in to purchases that will result in a negative balance, or decline the purchase.

Some financial institutions are providing alternatives. A growing number of banks are offering grace periods and small short-term loans for users who qualify, said The New York Times. And one, Ally Bank, said it would eliminate its $25 overdraft fee altogether and give customers six days to get in the black again before any penalties.

PNC Bank introduced a service to alert customers when their balances are low and when they go negative. If that happens, customers have 24 hours to rectify it and if not, are hit with an overdraft fee just once per day rather than per transaction.

Other banks are following suit, seeking compromises that help consumers while mitigating their own risks and protect profits.