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Capital One is biggest U.S. bank to end overdraft and insufficient fund fees

Capital One on Wednesday became the largest U.S. bank to say it will ditch all overdraft and insufficient fund fees for consumers, as regulators tighten their oversight of institutions that are heavily dependent on overdraft fees.  

The sixth-largest retail bank in the U.S. unveiled the move the same day the Consumer Financial Protection Bureau (CFPB) announced it would take action against banks whose practices it says take advantage of financially vulnerable consumers.

"Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model," CFPB Director Rohit Chopra said in a statement. "We will be taking action to restore meaningful competition to this market."

U.S. banks collected an estimated $15.5 billion in these kinds of penalties from customers in 2019. And the average fee for overdrawing an account in 2021 was $33.58, a 22-cent increase over the past two years, according to a recent Bankrate survey

Capital One said the move is part of its longterm goal of "reimagining banking." 

"Eliminating overdraft fees is another step in our effort to bring ingenuity, simplicity and humanity to banking," Capital One CEO Richard Fairbank said in a statement. 

The bank already offers an overdraft protection service, which it will now extend to all of its consumer banking customers for free, beginning in early 2022. 

For customers who are not enrolled, the bank will automatically decline transactions that would overdraw an account.

"Landmark moment"

Lauren Saunders, associate director of the National Consumer Law Center, called Capital One's elimination of fees a "landmark moment for American families," saying it protects Americans who are financially vulnerable and helps make the banking system more inclusive. 

Hefty banking fees hurt low-income families and families of color in particular, according to consumer advocates. 

"Capital One is the first top-10 bank, the first with a real branch network and the first with significant overdraft revenue to end its use of overdraft and NSF fees," Sanders said. "Its decision is especially meaningful given the major profits that come from these often predatory fees."

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

Previous CFPB research shows that roughly 9% of consumer accounts pay 10 or more overdraft fees per year, accounting for nearly 80% of all overdraft revenue for banks. 

The CFPB said it will crack down on banks whose profitability is seen as heavily dependent on overdraft fees. In recent years, the consumer agency ordered TD Bank to pay $122 million in penalties and customer restitution. It also ordered TCF Bank to pay $30 million in penalties and restitution for practices it alleged were "deceptive and abusive" to consumers. 

Some experts believe Capital One announced the change to preempt the CFPB's anticipated crackdown, and expect more banks to make similar moves. 

"Our expectation is that more banks will try to avoid CFPB enforcement actions by following the lead of Capital One and announcing they are ending the practice of charging for overdrafts and non-sufficient funds," said Jaret Seiberg, a financial services analyst for Cowen Washington Research Group.

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