Financial institutions are being hit yet again by the heavy hand of regulation, this time targeting overdraft fees. The smothering reach of the federal government has proposed capping these penalties, which are levied when customers overextend their balances, at a meager $5. This is just another chapter of a drawn-out campaign against so-called ‘junk fees’, covering everything from late payments on credit cards to hidden surcharges on concert tickets.
Banks unwilling to capitulate to this arbitrary cap are left with two alternatives, as per the Consumer Financial Protection Bureau’s final rule. First, they can adjust their fee to reflect the real cost they face when covering an overdraft protection. Alternatively, they can envision overdrafts as loans and let customers decide whether or not they want to opt into an ‘overdraft credit’ line.
The looming regulation is targeted at banks boasting more than $10 billion in assets and is set to become effective from October 2025, banking industry lawsuits notwithstanding. Over the years, the nation’s biggest banks have, allegedly, taken advantage of a regulatory grey area that, critics argue, has sucked billions out of American deposit accounts.
Supposedly, this regulation is set to result in savings of up to $5 billion in overdraft fees for bank customers annually, or roughly $225 per household that incurs these fees. It seems that the Biden Administration is more preoccupied with chasing overdraft fees than getting this country on the right track. This ‘crusade’ against banking industry fees was rolled out in January.
Given their track record, it is increasingly apparent that they have chosen to forcefully regulate instead of incentivizing fair practice. Banks have been accused of levying over-the-top overdraft fees, in some instances, upward of $30. Critics have made the controversial claim that these charges disproportionately affect America’s most vulnerable citizens.
Predictably, the banking industry did not take kindly to these new regulations. In fact, the banking industry countered that over 90% of them believe that such caps on overdraft fees will detrimentally limit the overdraft protections they can provide to their clients. We should concern ourselves with the wellbeing of our financial institutions if we aspire to economic robustness.
Despite Biden’s misguided pursuit of ‘fee justice’, fees for overdrafts and insufficient funds have experienced a significant reduction – almost a 50% decrease since the pre-pandemic era of 2019. Recent data reveals that, during the last quarter of 2022, financial institutions amassed $1.6 billion in overdraft and deficient fund fees, a sharp decline from the $3.1 billion earned during the same period in 2019.
A substantial number of big banks, pressured by regulators and lawmakers, voluntarily slashed or completely scrapped overdraft fees in 2021 and 2022. In doing this, these institutions demonstrated their commitment to the financial wellbeing of their customers without the need for federal shackles. Yet, the average overdraft fee only lowered from $33.58 in 2021 to $26.61 in 2023.
Suffice to say, most banks continue to levy these charges to some extent. This is likely a result of the cost of providing the valuable service of overdraft protection to their customers, and should not be demonized. But with the Biden Administration’s hounding regulatory trends, who knows how long this will last.
The Biden administration’s agenda also targeted late credit card payments fees. In March, the regulators issued a new rule capping late fees at $8. Again, we see the heavy hand of government seeking to control the industry, punishing banks for customers’ lack of responsibility. True to form, the banking sector pushed back, leading to a freeze on the late-fee cap by a federal judge.
Proponents project that this cap would result in a drastic saving of more than $14 billion a year for American families. Yet, they neglect to mention the practical ramifications of such a cap. Banking industry leaders argue that this cap could inadvertently cause higher interest rates for conscientious credit card customers who consistently manage to settle their bills on time.
In a troubling turn of events, we’ve seen this prophecy unfold. Credit card interest rates hit an unprecedented peak this year, with industry insiders attributing the surges partly to regulatory pressures. By trying to protect consumers from fees, the Biden administration may indirectly be punishing those responsible enough to avoid them in the first place.
Policies under the Biden administration have continued to demonstrate a shortsighted view of fee management and the role of banks in aiding the economy. The administration has persistently launched punitive regulations that only serve to stifle the industry, hindering the growth of financial institutions boosting our economy.
It appears that the Biden Administration and Kamala Harris are more set on making big banks the ‘bad guy,’ rather than focusing on implementing solutions that actually help everyday Americans. Regulating fees does not address the root causes of financial hardship or the real problems faced by those most vulnerable in our society.
Whether it’s overdraft fees, insufficient funds, or late credit card payment fees, the same can be observed: regulatory pressures are not the answer. The changes we need stem from education and personal responsibility, which no amount of top-down micromanagement can incentivize. The Biden administration’s ill-conceived strategy undermines the role of responsible borrowers and sustainable banking practices.