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Last week, the country’s largest banks announced their quarterly earnings, crushing estimates and expectations nearly across the board. It marked another surprisingly profitable quarter in what’s become quite a run since the coronavirus hit the U.S. over a year ago. Banks, to the surprise of nobody, have been among the first American institutions to recover, and have done so dramatically. Millions of working people lag behind.
One of the more unheralded profit centers that has driven that money train is the return of overdraft fees. In the last three months of 2020, 12 of the 15 largest American banks, all of them with consumer-facing banking operations, reaped huge revenue just from slapping overdraft fees on needy and vulnerable Americans during the very worst days of the pandemic.
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JPMorgan Chase, for example, made a stunning $1.5 billion in revenue on overdraft alone in 2020, according to recent FDIC filings. During that same period, Bank of America made $1.1 billion in profits, and Wells Fargo made $1.3 billion. The final three months of 2020, when the pandemic was at its most widespread and deadliest, were also the year’s most profitable, with all three of those banks pulling down over $300 million just in overdraft fees. So while Americans suffered through the worst wave of our worst public-health crisis in 100 years, with unemployment sky-high and intermittently lapsed federal benefits, the country’s biggest banks were gouging the poorest Americans for billions of dollars in punitive fees.
“Banks could’ve capped overdraft fees for a certain number of months, or had no fees during the pandemic, but they didn’t want to give up a dollar of overdraft revenue in any formal way,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending. “So what we see now is a return to business as usual, where our largest banks each took over a billion dollars out of the checking accounts of people during one of the worst years in our history. It’s a gobsmacking amount of money.”
OVERDRAFT IS ESSENTIALLY a forced high-cost payday loan. When a bank customer overdraws their account, they can still pay for whatever put them over the limit, but they are assessed an overdraft fee, typically around $35, for the privilege. That is often imposed on an overdrafted amount of money even much smaller than that, and can be repeated every day that an account remains overdrawn. The other option would be to deny transactions based on nonsufficient funds, but that wouldn’t make the bank any money.
This uniquely profitable part of the banking sector almost exclusively targets the very poor. According to a 2017 study by the Consumer Financial Protection Bureau, 5 percent of all accounts have over 20 overdrafts a year, which produce 63.3 percent of all overdraft fees paid by consumers. Another 4.2 percent of bank accounts have over ten overdrafts a year and make up more than 15 percent of fees paid by consumers.
Overdraft is a particularly pernicious form of predatory financial activity, functionally more exploitative and expensive than what we call the “alternative” financial sector of payday loans and check-cashing stores. As University of California, Irvine professor Mehrsa Baradaran writes in her book How the Other Half Banks, “If you consider the fee as a payment the customer makes for the extension of credit for the overdrawn amount, a 2008 Federal Deposit Insurance Corporation (FDIC) study showed that these fees carry an effective APR in excess of 3,500 percent!”
Levying overdraft fees on the financially insecure has become a larger and larger part of the business strategy for American banks over the past three decades, more than doubling as a source of income in that time period. Since the Great Recession, total overdraft fees have surged steadily upward, reaching a peak in 2019, when banks made $11 billion in revenue just on overdraft alone, almost 5 percent of total bank revenue.
At the beginning of the pandemic, Senate Democrats called on the banking sector to stop collecting overdraft fees. Sens. Cory Booker (D-NJ) and Sherrod Brown (D-OH) even introduced a bill temporarily halting such fees for the duration of the pandemic. But the bill didn’t move, and overdraft remained in place.
As the months wore on, it seemed that the problem might have solved itself, as overdraft revenues plunged. But that was not an expression of a more forgiving banking sector taking voluntary action. Rather, it was a result of the substantial short-term cash assistance from the CARES Act, with its stimulus checks and boosted federal unemployment insurance.
Levying overdraft fees on the financially insecure has become a larger and larger part of the business strategy for American banks over the past three decades.
Banks put out press releases sympathizing with the economic pain—they even suggested customers could call to get an overdraft penalty refunded if it was “pandemic-related.” But that was never a serious commitment. There are millions of instances of overdraft every year in the United States, and setting up a mass refund program would have required massive call center hiring and staffing to process that volume of requests. They were never serious about it, and it never amounted to much.
Speaking of CARES: There were concerns that low interest rates and the economic conditions instated by the recovery effort and the lockdowns would be crippling to banks. So CARES made them whole by, among other things, routing the entirety of the Paycheck Protection Program through them, for which big banks were then allowed to charge a lucrative percentage for doing mechanical, risk-free administration. The program was purposefully crafted in some part to make the banks whole. Banks made $25 billion just administering PPP loans.
The Federal Reserve, meanwhile, announced on the heels of the signing of CARES that it would be “suspending uncollateralized intraday credit limits” and “waiving overdraft fees for institutions that are eligible for the primary credit program,” literally waiving overdraft fees for large banks during the early months of the pandemic to help them with liquidity problems. So while the federal government excused banks from paying overdraft penalties in a time of crisis, those very same banks turned around and continued to levy harsh overdraft charges on their neediest customers.
Of course, the banks were made more than whole, and in record time. And because there were never any assurances or commitments required, overdraft numbers quickly began shooting back up. By the end of 2020, banks were back to putting up huge profits, and overdraft numbers were on a steep upward climb, nearly doubling just six months after early 2020’s nadir. The overdraft trend, interrupted in 2020, has returned.
BECAUSE THEIR RECOVERY has gone so well, last December the Federal Reserve allowed banks to return to the time-honored tradition of buying back their stock. JPMorgan Chase, Bank of America, and Wells Fargo have all committed to buying back billions of dollars in shares to boost the share price and make good for their investors.
This provides for a tidy comparison. In the case of JPMorgan, almost 50 percent of their $3.2 billion share buyback commitment can be paid for by their year of overdraft fees alone. For Bank of America, their $1.1 billion in 2020 overdraft fees is good for 38 percent of their $2.9 billion stock buyback program. And for Wells Fargo, overdraft totals from 2020 are nearly double their stock buyback pledge. That makes for as tidy a portrait as any of the ways that, in the modern financial sector, the poor pay the rich. The fact that JPMorgan Chase, whose CEO Jamie Dimon proclaimed in his letter to shareholders in early April an urgent need to take on racial and economic crises in the United States exacerbated by COVID, outpaces all other banks in its overdraft revenue, imposed disproportionately on poor people of color, is just the cherry on top.
There are ample opportunities for both Congress and the Biden administration to rein in overdraft, and regulation has been successful in the past. Obama’s Consumer Financial Protection Bureau enacted some important transparency standards. But under Trump, regulating overdraft lost all momentum, and nothing was done. There are currently proposals in both the House and Senate, from Rep. Carolyn Maloney (D-NY) and Sen. Booker, that would curtail the most exploitative aspects of overdraft, but neither has been seriously taken up yet.
Meanwhile, the CFPB and the Office of the Comptroller of the Currency both have nonlegislative authority to regulate the practice as well. There is some hope that the appointment of Rohit Chopra as the director of Biden’s CFPB means that the organization will make the issue a priority; the aforementioned Baradaran has been rumored as the likely appointment to head up the OCC, though Biden still hasn’t gotten around to making an official announcement of her, or anyone else, for the role. The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve could regulate overdraft as well.
What’s clear is that the wishful thinking surrounding overdraft has been thoroughly dispelled by this most recent round of financial reporting. The most predatory aspects of overdraft are back, and will not be regulating themselves.