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Ally Bank scraps overdraft fees for all customers, citing racial impact

Survey reveals racial disparity in bank fees
Survey finds minorities pay more in bank fees, and other MoneyWatch headlines 01:33

Customers at Ally Bank will no longer be charged a $25 overdraft fee no matter what type of account they hold, the company said Wednesday. 

In announcing the new policy, Ally said fees for insufficient funds disproportionately harm low-income households living paycheck to paycheck as well as Black and Hispanic families. Ally, an online bank and unit of publicly held Ally Financial, joins Discover as one of the few banks that no longer charge overdraft fees.

Ally is also eliminating overdraft fees to reduce stress on its customers and simplify how their accounts work, said Diane Morais, Ally's consumer and commercial banking president.

"Overdraft fees can be a major cause of anxiety," she said in a statement. "It became clear to us that the best way to relieve that anxiety was to eliminate those fees." 

Overdraft fees are a significant source of revenue for banks, especially smaller lenders. Ally generated $5 million in overdraft fees in 2020 even after waiving those fees for much of the year due to the pandemic. In 2019, U.S. banks generated nearly $12 billion in overdraft and insufficient fund fees, according to the Center for Responsible Lending.

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Still, eliminating the fees at Ally will likely help its lower-income customers better stabilize their finances, CEO Jeffrey Brown said Wednesday.

"Overdraft fees are a pain point for many consumers, but are particularly onerous for some," he said in a statement. "It is time to end them." 

Ally's announcement comes one week after Sen. Elizabeth Warren, speaking at a Senate Banking Committee hearing May 26, condemned the CEOs of major banks for how much money their companies generated in fees during the coronavirus pandemic

The Massachusetts Democrat said customers at Bank of America, JPMorgan Chase, Citigroup and Wells Fargo paid a combined $4 billion in overdraft fees, with low-income and people of color paying most of the fines. 

"Over the past year, you could've passed on the breaks that you got from the Fed to your customers, but you didn't do it," Warren told the CEOs. "No matter how you try to spin it, this past year has shown that corporate profits are more important to your bank than offering just a little help to struggling families, even when we are in the middle of a worldwide crisis."

Dimon told Warren that the bank waived fees for customers upon request if they were under financial strain because of the pandemic.

"Evidence is clear"

Critics have long urged banks to reduce or eliminate ATM, overdraft and other fees, arguing that such charges typically hit lower-income customers the hardest.

"The evidence is clear that overdraft fees are levied most frequently on families who can least afford it, disproportionately harming low-income and Black and Latino Americans," Rebecca Borné, senior policy counsel at the Center for Responsible Lending said in a written statement in response to Ally's decision.

"Abusive overdraft practices are causing people who are struggling to get by to lose their bank account – something diametrically opposed to the financial industry's claim it wants to bring more Americans into the mainstream banking system," she said.

Hispanic and Black households paid $3.1 billion and $1.4 billion, respectively, in overdraft fees last year, according to a recent report from the Financial Health Network, a research and consulting firm. Black Americans forked over $800 million last year on fees for checking account maintenance, money orders and check-cashing, while Hispanic families spent $1.1 billion on those services. 

Paying billions in fees "exacerbates the financial distress felt by many families and contributes to a well-documented and growing financial gap in this country," Financial Health Network CEO Jennifer Tescher said last month.

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