Economic strains due to supply chain issues and continued pressure from the COVID-19 pandemic have left many Americans in a tough spot. It is getting more difficult to afford basic necessities for their families, and both lawmakers and regulators are rightfully turning their attention to the things that needlessly compound those challenges.
Among the biggest unnecessary challenges that Americans continue to contend with are the overdraft fees that banks levy when someone—often mistakenly—attempts to make a payment beyond the funds available in their checking account. These fees cost Americans billions each year, and now both the Biden administration and lawmakers on Capitol Hill are set to further explore the issue in the months ahead.
This scrutiny arrives at the perfect time, as data shows more consumers are overdrafting their bank and credit union accounts than had been before, no doubt in large part because of the struggles we've all faced in recent years. Considering overdraft fees hit a record high in 2021, and that nearly 20 percent of Americans overdrafted last year, it's clear the threat these fees pose to Americans' financial well-being is growing just as they are struggling most.
As overdraft fees increasingly weigh on Americans more broadly, it's important to note the ways in which they have an outsized and disproportionate impact on low-income communities across the country. According to recent data, financially vulnerable households averaged 9.6 overdrafts in 2021 and financially coping households averaged 3.9, while financially healthy households averaged just two. Each individual overdraft fee may not initially seem jarring on the surface, but combined with how often these fees affect those with limited means, it quickly becomes apparent just how rapidly these fees can add up.
Overdraft fees also do a disproportionate degree of harm to minority communities throughout the U.S. In fact, Black households were 1.9 times more likely to have overdrafted their accounts than white households last year, while Latinx households were 1.4 times more likely to have overdrafted than white households. Overdraft fees limit these communities' financial mobility, and hurdles such as this must be addressed moving forward.
Simply put, overdraft fees do the greatest amount of harm to the Americans who are least able to bear the costs, and the time to get rid of the threat these fees pose once and for all is long overdue. Fortunately, it's not only lawmakers in Washington taking notice of this issue, and the fact that leaders within the financial industry have already taken proactive steps to reduce these fees should provide a source of hope and optimism for Americans.
Ally Bank became the first major bank to eliminate overdraft fees entirely last summer, and the bank took an extra step by implementing a new program to protect consumers from accidental overdrafts. Since Ally's announcement, other institutions have followed their lead to dismantle overdraft fees.
Given the impact overdraft fees have had nationwide, I am confident that members of Congress who have the ability to bring this issue to the forefront of public attention will do just that. Representatives Carolyn Maloney (D-N.Y.) and Maxine Waters (D-Calif.) have already been working to bring greater awareness to the harmful effects of overdraft fees and advocated for limiting the impact they have on consumers. Now, upcoming dialogue and action that comes out of Washington should use what industry leaders are already doing as a model for what can and should be achieved for consumers.
The economic difficulties created by the pandemic, supply chain woes and other factors have revealed serious weaknesses in the way Americans are provided essential financial services and these shortcomings need to be remedied in order to protect our most vulnerable neighbors moving forward. Doing away with overdraft fees is a great place to start.
Dr. Maya Cummings is the former vice president of research and programs for the Congressional Black Caucus Foundation, former chief of staff to congressman Charles Rangel (D-N.Y.) and the widow of Elijah Cummings.
The views expressed in this article are the writer's own.
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
