Overdraft Fees Reduce Low Income Families
Banks have spent the past few years rolling back some of their most controversial fees — changes that, in theory, should ease the burden on financially troubled households. Some major institutions, including Capital One, Citibank and Ally, have eliminated overdraft fees altogether, while others have reduced fees or added grace periods that limit payments.
But new research suggests that those overdraft recovery efforts aren’t reaching the people who need it most.
According to a new study by the National Bureau of Economic Research, or NBER, recent banking reforms aimed at reducing overdraft penalties ended up disproportionately benefiting high-income households, while financially vulnerable consumers saw little relief.
This study, which analyzed transaction data from tens of thousands of American bank customers between 2018 and 2023, found that while the elimination of insufficient funds (NSF) – banks charge when transactions are rejected due to insufficient funds – led to a rapid decrease in those costs across all income groups.
However, in contrast, reductions in overdraft fees – which are assessed when the bank makes a transaction that exceeds the account balance – were small, decreasing by around 4.9% and mostly limited to households with high incomes.
The difference comes down to banks choosing to change their policies. While NSF funds have been largely eliminated, many changes to overdraft fees have increased, increasing the threshold at which a payment comes in or adding a grace period before charges are incurred.
But these types of adjustments only help if customers can quickly bring their balances back above zero or avoid incurring a charge in the first place. That’s much easier for households with a lot of cash on hand. For people who live paycheck to paycheck, even a small shortfall can still result in an overdraft fee — meaning these “deep” policy changes often don’t prevent a penalty at all.
“Overdraft fee policy changes have created small incentives for depositors, such as a 24-hour grace period,” Sharada Sridhar, co-author of the study and assistant professor of finance at Georgia Tech’s Scheller College of Business, told Money. “The highest income families are the ones who have enough resources to use these grants – they have enough money to use the 24-hour grace period.”
In contrast, he adds, NSF funds were phased out entirely, allowing households of all incomes to benefit equally.
But the consequences don’t stop at overdraft fees. The NBER study finds that households benefited from those changes — especially high-income consumers — and saw a decrease in late fees, interest payments and reliance on high-interest loans like payday loans.
The researchers attributed those improvements to the policy changes themselves, and found that these effects declined significantly even after accounting for broader economic changes such as changes in interest rates over the same period. Their analysis, Sridhar explains, accounts for differences over time and across regions, which he says allows them to isolate the effects of the bank’s policy changes.
Low-income families, on the other hand, saw disproportionately small improvements in all of those indicators.
The high fees have hit vulnerable families hard
For years, consumer advocates have warned that overdraft fees act as a regressive penalty, ultimately affecting those with little room in their budgets. As of 2023, a study from the Consumer Financial Protection Bureau, or CFPB, found that 34% of households earning less than $65,000 were charged an overdraft or NSF fee in a given year, compared to 10% of those earning more than $175,000. That same year, consumers across the board paid more than $11 billion in overdraft and NSF fees.
Efforts to bring them back to the government level are also uneven. A proposal by the Biden-era CFPB would have set the maximum overdraft fee at $5, but the rule was vetoed last year by the Trump administration, which said it would lead to “reducing access to credit and critical financial resources.” As a result, banks always control when and how these fees are charged.
Even as some major banks reduce some of these fees, households that may have received them continue to see little benefit.
More from Mali:
Despite the changes, Excessive Fees Still Hurt Low-Income Americans
Will Overdraft Fees Rise Under Trump? Here’s What We Told You About 7 Banks
I Got My Bank To Cancel Overdraft Fees In 5 Minutes. Here is the Method
