Ally Financial (ALLY), having tested a banking model without overdraft fees, is making it permanent. The move applies to all types of accounts — including checking and savings — and there are no requirements or restrictions.
In April 2020, Ally began to waive overdraft fees, citing coronavirus pandemic hardships many customers faced. On June 2 Ally said it’s eliminating those fees for good.
“Overdraft fees are a pain point for many consumers but are particularly onerous for some. It is time to end them,” CEO Jeffrey Brown said in a press release. The fees used to be $25, though Ally said they never charged a customer more than one per day and the company gave a $10 grace amount before it used to charge..
“Other banks say they’ve eliminated overdraft fees, but that’s because they don’t allow overdrafts,” Ally spokesperson Justin Nicolette told Yahoo Finance in an email. Other banks offer “protection” that allows for funds to transfer from a savings account to cover the transaction. Full elimination of fees is rare: notably, Discover Financial eliminated them in 2019.
Overdraft fees are a huge money maker for banks and credit unions. Estimates differ but every year, around $34 billion is deducted from overdrawing accounts, often some of the most vulnerable banking customers who unknowingly sign up so that the transaction goes through with a fee rather than declines. According to the Center for Responsible Lending, whose calculations found a different (but still very high) fee number at around $12 billion. A typical overdraft fee is $35 while the cost of an overdraft to a bank is "very low."
“Nationwide, 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 keep people from falling further behind and feeling penalized as they catch up.”
According to one report Ally cited, 95% of people who paid overdraft fees in 2020 were financially vulnerable and "disproportionately Black and Latinx," Ally noted.
If a person overdrafts their account, they have a few days to put the necessary funds in to continue using the account for withdrawals. Customers have even more time to get square before the account closes. Ally told Yahoo Finance that 97% of negative balances “are cured within 30 days." For many customers, this leeway is a big deal.
For Ally, overdraft fees were never a major driver of revenue, which allowed for the online bank to make this move. But as a big money-maker for the industry, this move may put pressure on others.
In October 2019, TD Ameritrade, Schwab, and other big brokerages stopped charging commissions for trading stocks after no-fee Robinhood gained enough force in the market.
Going forward, a question is whether this move in banking may have a similar domino effect in everyday banking. Banking, like trading, is computer-driven and cheap and fees that used to be there to offset costs now simply exist via 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 consumer-friendly direction.