Ally Bank has stopped charging overdraft fees to any of its customers.
Ally temporarily waived some overdraft fees starting in April 2020, citing COVID-19 hardships. This latest move is more permanent.
“Overdraft fees are a pain point for many consumers but are particularly onerous for some. It is time to end them,” Ally Financial CEO Jeffrey Brown said in a press release.
This is great news for customers and could signal the start of a sea change for big banks, which notoriously profit immensely from charging relatively small fees to huge customer bases.
Let’s say you write a check or get charged for a recurring online payment, but you don’t have enough money in your account to cover it. Typically, banks will charge you what’s called an “overdraft fee” for forcing them to cover the amount for you.
“I congratulate Ally for saying that you now are not going to be put in that fee-to-death situation when you write an NSF [non-sufficient funds] check,” money expert Clark Howard said.
“[Charging overdraft fees] is to me an abusive thing. The banks look at it as a way to run away with your money at a time when you’re obviously already short of funds.”
Modern Overdraft Fees: Change Coming?
Depending on which source you believe, banks made anywhere from $12 billion to $30 billion in revenue from overdraft fees in 2020. The Big Four — Chase, Wells Fargo, Citi and Bank of America — took in a combined $4 billion on overdraft fees alone.
It costs less than $1 — sometimes far less — for a bank to process a bounced check, according to Clark. He says that over time, banks have gone from passing along that cost to the customer to charging a large, profit-centric multiple of their own cost. Listen to Clark at the 9:30 mark of this recent podcast to hear more of his opinion on overdraft fees.
These fees can hit lower-income households more frequently, as they’re more likely to be short on funds. People who took a financial hit during COVID-19 paid more than four times as many fees to banks, according to a Bankrate.com survey published in January.
Ally made my short list of the best online banks earlier this year. Along with credit unions, Clark much prefers online banks to traditional banks because the good ones tend to charge very few fees.
This move by Ally Bank isn’t unprecedented. Discover Financial eliminated fees in 2019. However, some banks that have claimed to eliminate overdraft fees simply don’t allow overdrafts. Others offer a type of “overdraft protection,” which Clark strongly advises against.
Ally’s decision is welcome move for consumers — and perhaps a splash that will cause broader ripples through the banking world.
Ally held about 2.3 million customers and $124 billion in deposits at the end of 2020, according to Fortune. It is one of the largest online banks.
Optimists may draw a comparison between Ally’s move and what happened in the brokerage industry. There, Robinhood created a movement by offering commission-free stock trades. Huge companies such as Schwab and TD Ameritrade evntually followed suit, creating a domino effect. Commission-free trades are now commonplace.
Wrote Yahoo! Finance: “Going forward, a question is whether this move [by Ally] 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.”