On December 8, 2021, Acting Comptroller of the Currency Michael J. Hsu shared his thoughts regarding overdraft practices at the Consumer Federation of America’s 34th Annual Financial Services Conference.
Mr. Hsu stated, “As we all know, it is expensive to be poor. And a significant part of that expense comes from the products and services offered by banks themselves. As the Brookings Institution has noted recently, ‘The existing system is regressive (reverse Robin Hood), creating structural barriers and elevating costs to those on the lower end of the income spectrum, while simultaneously showering benefits to those on the upper end.’”
Traditional bank overdraft programs are a significant part of this problem. Of course, the easiest way to eliminate overdraft fees would be to eliminate overdrafts. Some banks, like Ally, are doing this, and many banks offer basic accounts, such as Bank On accounts, which do not allow overdrafts and as such make it impossible for customers to incur overdraft fees. While this prevents harm, it can also limit financial capacity. For those living paycheck to paycheck, the flexibility offered by low- to no-cost overdrafts can empower them to pay their bills on time, avoid high-cost alternatives, and improve their credit profile. Therefore, our goal should be to improve people’s financial health—i.e., their ability to spend, save, and borrow so that they are empowered rather than hindered.
Policy discussions about financial inclusion and overdrafts have tended to center on:
(A) Reducing the unbanked population, and
(B) Eliminating overdraft fees.
A natural solution for both is the Bank On account. Bank On’s National Account Standards set a baseline standard for safe, affordable, and appropriate accounts that meet the needs of low-income consumers, particularly those outside of the financial mainstream. All banks should offer Bank On accounts or the equivalent.
The OCC staff’s review of overdrafts has identified several features of bank overdraft programs that could be modified or recalibrated to support financial health. These include banks:
- Requiring consumer opt-in to the overdraft program.
- Providing a grace period before charging an overdraft fee.
- Allowing negative balances without triggering an overdraft fee.
- Offering consumers balance-related alerts.
- Providing consumers with access to real-time balance information.
- Linking a consumer’s checking account to another account for overdraft protection.
- Collecting overdraft or NSF fees from a consumer’s next deposit only after other items have been posted or cleared.
- Not charging separate and multiple overdraft fees for multiple items in a single day and not charging additional fees when an item is re-presented.