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Ally Bank Eliminates Overdraft Fees: Will Other Banks Follow?

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In an unprecedented move, Ally Bank — the digital bank and a division of Ally Financial (ALLY - Free Report) — announced the elimination of overdraft fees on all accounts (including checking and savings), effective immediately. All Ally Bank customers are entitled to the same and there is no additional requirement or conditions to be fulfilled.

Jeffrey Brown, the CEO of Ally Financial, said, “Overdraft fees are a pain point for many consumers but are particularly onerous for some. It is time to end them. Nationwide, more than 80% of overdraft fees are paid by consumers living paycheck to paycheck or with consistently low balances – precisely the people who need help stabilizing their finances. Eliminating these fees helps keep people from falling further behind and feeling penalized as they catch up.”

It is worth noting that while the overdraft fees used to be $25 per transaction, Ally Bank has never charged the same for debit card transactions or charged more than one overdraft fee per day. Further, beginning April 2020, the company had begun waiving overdraft fees, amid the coronavirus pandemic as many customers faced financial hardships.

In an e-mail to Yahoo Finance, Justin Nicolette, Ally Financial spokesperson, stated, “Other banks say they’ve eliminated overdraft fees, but that’s because they don’t allow overdrafts.”

Additionally, for Ally Bank, overdraft fees are not a major source of revenues. But the same can’t be said for others.

Overdraft fees are a huge income generator for banks. Per the 2021 FinHealth Spend Report, banks (in aggregate) earned $12.4 billion in overdraft fees last year. Notably, the report states that 95% of the customers who paid these fees were “financially vulnerable.”

Further, late last month, the CEOs of big banks — JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) — faced tough questions from Sen. Elizabeth Warren with regard to overdraft fees. According to the Senator, the four banks collectively earned approximately $4 billion in overdraft fees in 2020, with JPMorgan having the largest share of roughly $1.5 billion.

Though the amount is not huge in comparison to what these banks earn in total fee income, the CEOs declined when asked by the Senator Warren if they would voluntarily refund the fees to their customers. Nonetheless, for several small and mid-sized banks like Regions Financial (RF - Free Report) and Huntington Bancshares Inc. (HBAN - Free Report) , overdraft fees remain one of the major sources of fee revenues.

At the time, when banks are facing faltering loan demand and lower interest rates, any step to eliminate such lucrative source of income could hurt their financials. Yet, the step taken by Ally Bank may turn out be a game changer and help garner more market share.

Hence, we might see banks taking similar steps, going forward.

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