We’ve all been there: you have a bank account, or you get a new credit card from your usual bank, and everything is fine… Until you see the fees they’ve charged you. In the past, we resigned ourselves to it and, at most, switched to another bank that offered better services, but from now on, some of the fees charged by our banks will be a thing of the past. They are called junk fees, and they are the target of a federal campaign to eradicate them.
In fact, the Consumer Financial Protection Bureau (CFPB) has launched an ambitious initiative that seeks to save American households an impressive amount of money. It is estimated that eliminating these abusive fees could save US citizens US$19.5 billion.
What are these abusive fees?
The CFPB defines these abusive fees as any fee that far exceeds the marginal cost of the service they are intended to cover. Banks use them to disguise the real price of their products and in price competition. And it is very lucrative for them: the banking sector collected $11.8 billion in 2023 and $12.1 billion in 2024.
Paradoxically, even though major banks have reduced—or even eliminated—some fees, total overdraft and insufficient funds revenue across the industry increased slightly. The overdraft fee is perhaps the most controversial of all. What began decades ago as a “courtesy” to cover a one-time check has evolved into a money-making machine. On average, large banks typically charge $35 for an overdraft loan.
The reality is that most debit card overdrafts are for less than $26 and are repaid within an average of three days. Applying a $35 fee for such a short-term loan means that the fee structure equates to an annual percentage rate of 16,000%, which makes it a form of predatory lending.
Will these abusive fees be totally eliminated?
It has reached such a point that the banking industry has had to choose between two paths. Some of the largest banks, such as Capital One, Citibank, and Ally Bank, have decided to eliminate them entirely. Others have opted instead to strategically mitigate them in order to retain customers while reducing their dependence on these abusive fees:
- For example, Bank of America eliminated the NSF fee in 2022 and reduced its overdraft fee from $35 to just $10.
- BMO Harris and Huntington Bank have adjusted their fee to $15.
- Meanwhile, institutions such as JPMorgan Chase and U.S. Bank eliminated NSF fees and implemented “cushions” or grace periods.
- In the case of JPMorgan Chase, they have created a negative balance cushion of $50 before applying any fees.
The TILA Loophole
All of this is due to the closing of a loophole in the Truth in Lending Act (TILA). Historically, overdrafts have always been exempt from TILA, allowing banks to offer this credit without informing consumers. The proposed new rule would require all large financial institutions—those with $10 billion or more in assets—to treat overdrafts as credit. In other words, these overdrafts would be subject to the same regulations as credit cards. The goal is to limit the fee that the bank actually needs to cover its costs.
Instead of the punitive profit incentive that was the previous $35 fee, I want to enforce greater transparency by offering banks a cost recovery benchmark charge, ranging from $3, $6, $7, or $14.
Maintenance fees
Credit cards will also be freed from a number of abusive fees. The CFPB has banned abusive late payment fees for the largest banks. The typical late payment fee was an average of $32.
From now on, they will be capped at $8 in most cases. The industry was generating more than $14 billion in late fee revenue, an amount that was five times more than its associated collection costs. If there’s one thing we know, it’s that it was very profitable for banks when the average citizen needed an overdraft or was slightly in the red.