Dive Brief:

• Capital One is eliminating overdraft fees for its consumer bank customers, the McLean, Virginia-based bank announced Wednesday.
• With the move, Capital One becomes the largest U.S. bank to eliminate the fee. The bank said its customers can choose whether or not to access overdraft protection, and all customers who are enrolled in overdraft protection will be automatically converted to no-fee overdraft early next year. Transactions that would overdraw an account will be declined for customers not enrolled, with no fees assessed, the bank said.
• The new policy is expected to cost the $425.4 billion-asset bank $150 million in lost revenue per year, a company spokesperson told Banking Dive.

Dive Insight:

In an internal memo shared with Banking Dive, Capital One CEO Richard Fairbank told employees the bank’s decision to eliminate the fee is an "important mission moment" for the company and its customers. 

"The bank account is a cornerstone of a person’s financial life," Fairbank said in a statement. "It is how people receive their paycheck, pay their bills and manage their finances. Overdraft protection is a valuable and convenient feature and can be an important safety net for families. We are excited to offer this service for free."

Fairbank highlighted past efforts the bank has made regarding the fees it charges, hinting there’s more to come. 

"We have capped fees, waived fees, and introduced grace periods for consumers to turn their balances positive before fees are assessed," he said. "Our fee levels are at the far low end of the industry. But we aren’t done yet. We are going to zero."

The bank plans to make its free overdraft protection service available to all of its customers by the first quarter of 2022, Fairbank said.

"Free overdraft protection can be a very good thing. But we want to make sure it’s not too much of a good thing," Fairbank said, adding the bank wants to make sure people use the service responsibly. "First, we want to be sure that people want it. We will ask customers to choose whether they want Capital One to provide this service." 

Customers will need to show a pattern of steady deposits to be able to access the free overdraft protection, Fairbank said. 

"[W]e want to ensure that consumers will have an ability to cover their occasional overdrafts," he said, adding the bank will look at customers’ behavior to make sure they aren’t frequent overdrafters. "We don’t want our customers becoming reliant on spending money that they don’t have. That defeats the purpose of an overdraft buffer."

Capital One is the latest — and largest — financial institution to eliminate overdraft fees, a revenue source that, according to Fairbank, exceeded $14 billion industrywide in 2019.

"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."

At least one lawmaker seized on the announcement Wednesday to prod other banks to rein in overdraft fees. In a tweet Wednesday, Sen. Elizabeth Warren, D-MA, lauded the development as "a good move by @CapitalOne," then tagged JPMorgan Chase's Twitter handle, suggesting the nation's largest bank "do the same."

Warren, during a May hearing with six bank CEOs, engaged in a testy exchange with JPMorgan chief Jamie Dimon, calling him "the star of the overdraft show," and saying the bank collected close to $1.5 billion in overdraft fees throughout the previous year. Dimon disputed the figure.

Amid increased lawmaker and regulator scrutiny, 2021 has proven to be a year in which many financial institutions are rethinking their overdraft policies. 

Digital-only financial institutions Ally Bank and Alliant Credit Union eliminated the fee in June and August, respectively. 

Other institutions introduced services this year aimed at helping clients avoid overdraft fees, such as alerting customers when their accounts are low, or giving them a grace period to cover the overdraft.

Citizens Bank in October introduced technology that alerts users to overdraft withdrawals — a feature akin to PNC's "low cash mode," an offering — announced in April — that gives the bank's customers a 24-hour buffer before overdraft fees are charged.

Columbus, Ohio-based Huntington Bank in June launched a digital-only loan product that would give eligible customers immediate access to a line of credit up to $1,000 with no interest or fees if they sign up for automatic payments.

Santander last month softened its policy to allow customers to overdraw their accounts up to $100 without penalty. San Antonio-based Frost Bank debuted a similar feature in April.

TD Bank unveiled a deposit account in June that does not allow customers to overdraw funds and does not have a minimum daily balance requirement.

Other overdraft alternative products launched this year have maintenance fees attached. Regions' Now Checking option charges a flat $5 monthly fee and links a user's Regions accounts to provide overdraft protection without transfer fees. Bank of America's Balance Connect ferries money from another of the user's Bank of America accounts to an overdrawn one for a $12-per-transaction fee.