Chase Bank, the nation’s largest consumer bank, has issued a stark warning to its 86 million customers: checking accounts might no longer be free if the federal government enforces regulations capping overdraft and late fees. This potential shift comes as the Consumer Financial Protection Bureau (CFPB) proposes new rules that could significantly reduce the fees banks can charge for overdrafts and late payments.
Currently, Chase charges a $34 overdraft fee per transaction that overdraws a balance by more than $50, with a maximum of three fees per day. This means a customer could be charged up to $102 in a single day for overdrafts. However, under the new proposal, the cost to overdraw on a bank account could drop to as little as $3. Similarly, credit card late fees could be capped at $8.
Marianne Lake, CEO of Consumer & Community Banking at Chase, expressed concerns about the impact of these regulations. She told the Wall Street Journal that if the regulations pass, other banks are likely to follow Chase’s lead in charging for services that are currently free. Lake emphasized that the changes would be “broad, sweeping, and significant,” and could disproportionately affect those who can least afford additional banking costs.
Lake warned that the industry might make sweeping changes to how products and services are offered and priced. She suggested that obtaining credit could become much more expensive and that free checking might only be available to the most affluent Americans. The banking industry is expected to challenge the regulations, potentially taking the fight to the Supreme Court.
The proposed regulations are part of a broader effort by the Biden administration to combat fees that it says pose an unnecessary burden on American consumers, particularly those living paycheck to paycheck. President Joe Biden has made the elimination of “junk fees” a cornerstone of his economic agenda, especially as the 2024 election approaches.
Banks charge overdraft fees when a customer’s account balance falls below zero. Originally, overdraft services were a courtesy to prevent bounced checks, but they have become a significant revenue stream for banks with the rise of debit card transactions. For instance, a $10 debit card transaction could cost a customer $40 if their balance goes negative.
Biden criticized these fees, stating, “For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines. Banks call it a service — I call it exploitation.”
Under the proposed rule, banks would only be able to charge customers what it costs them to break even on providing overdraft services. This would require banks to demonstrate their costs to the CFPB, a task many banks would likely find burdensome. Alternatively, banks could adopt a benchmark fee applicable across all financial institutions, with proposed fees ranging from $3 to $14.
Research by Bankrate last August found that the average overdraft fee was $26.61, with some banks charging as much as $39. The CFPB estimates that the nation’s largest banks still collect roughly $8 billion in overdraft fees annually. These fees disproportionately impact low-income households and communities of color, who often overdraft multiple times a year.
The proposed rules would apply only to banks with more than $10 billion in assets, sparing smaller banks and credit unions that rely more heavily on overdraft fees. CFPB officials noted that the largest banks, where most Americans do their banking, are responsible for the majority of overdraft fees.
Overdraft fees have been a lucrative source of income for banks, with the CFPB estimating that banks have collected $280 billion in overdraft fees over the past 20 years. However, in response to political and public pressure, many banks have already made changes to their overdraft practices. For example, Bank of America reduced its overdraft fee from $35 to $10 two years ago, and JPMorgan Chase now offers a $50 cushion before charging overdraft fees.
Despite these changes, the banking industry is expected to vigorously oppose the new regulations to protect their fee revenue. If the rule is adopted and survives political and legal challenges, it would go into effect in the autumn of 2025.
Banks argue that government regulations on overdraft fees could lead to the elimination of the service altogether. While some banks have already eliminated overdraft fees and created accounts that cannot go negative, Bankrate estimates that about 90% of banks still offer the service.
Lindsey Johnson, president and CEO of the Consumer Bankers Association, warned that the proposal could deprive millions of Americans of a valuable emergency safety net and push more consumers out of the banking system.
As the debate over these proposed regulations continues, Chase Bank and other financial institutions are preparing for a potential shift in how they charge for services. The outcome of this regulatory battle could have significant implications for both banks and consumers across the country.
Source: The Associated Press, Wall Street Journal
