Capital One to drop overdraft fees for all retail banking customers

It’s the largest U.S. bank yet to end the lucrative industry practice of charging customers a hefty fee, typically $25 to $35 each instance.

Capital One is eliminating all overdraft fees for retail banking customers, according to a memo distributed to employees on Wednesday.

It’s the largest U.S. bank yet to end the industry practice of charging customers a hefty fee, typically $25 to $35 each instance, for allowing transactions that exceed a customer’s balance, according to the McLean, Virginia-based lender.

The move will cost the bank an estimated $150 million in lost revenue per year, according to a company spokesperson.

For years, banks have been under pressure to eliminate overdraft fees because they often punish those who can least afford to pay them.

“We will completely eliminate overdraft and non-sufficient funds (NSF) fees for all Capital One consumer bank customers,” CEO Rich Fairbank told the bank’s employees in the memo, calling it a “first for major banks in the U.S.”

For years, banks have been under pressure from consumer advocates to eliminate overdraft fees because they often punish those who can least afford to pay them: Americans struggling to make ends meet. The rapid growth and surging valuations of a new crop of fintech-enabled digital banks with no-fee models has added pressure to the industry, however.

In June, Ally Bank said that it was dropping the punitive fees. Other banks including PNC Bank and Bank of America introduced features that make it less likely for a customer to trip into overdraft, without eliminating the revenue source completely.

While Ally is an online-only bank without physical branches, Capital One maintains about 350 physical locations and 70,000 ATMs in states including New York, New Jersey, Texas, Maryland and Virginia.

Overdraft fees are a lucrative revenue source for the industry, and one that has been difficult for big banks to drop. The industry reaped more than $14 billion in overdraft fees in 2019, Fairbank said in the employee memo. Capital One took in $131 million in service charges and other customer fees in the first nine months of 2021, according to disclosures.

Sen. Elizabeth Warren has lambasted the industry, and JPMorgan Chase and its CEO Jamie Dimon in particular, on the unpopular fees. When confronted by Warren this year on the matter, Dimon refused to end the practice.

Before the policy change, which will start in January, Capital One charged customers $35 overdraft fees, capped at four such fees per day, or up to $140 daily. Then, in August, the bank capped overdraft fees at one daily and eliminated NSF fees, the bank said.

The banking industry reaped more than $14 billion in overdraft fees in 2019.

Customers who dip into overdraft fees often inadvertently trigger a cascade of such fees, compounding the financial hit, industry advocates have said.

“This move by Capital One will have tremendous benefits for the most vulnerable consumers,” Lauren Saunders, associate director of the National Consumer Law Center, said in a statement. “It’s critical we keep working to make the banking system more inclusive and fair for all.”

Now, when Capital One customers attempt transactions that dip beyond their balances, they will mostly use the bank’s free overdraft protection service, the bank said. Customers who paid the fees will be automatically rolled over into the service early next year, the bank said. Those who opt out of the service will simply have overdrawn transactions declined at no fee.

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