This week, only online banking institution Ally Bank announced that it would no longer charge overdraft fees to its customers.

This is good news for their current or potential customers, who are worried about returning checks or charging debit cards for fees they don’t have enough money.

Of course, we should never do that, but it does happen sometimes, and historically when it does, banks make a lot of money from fines.

Ally’s cancellation of the overdraft fee is influential news for the entire banking industry, which has reduced overdraft and insufficient funds costs by billions of dollars. Ally’s move could force other banks, including long-established companies, to follow suit.

What overdraft fees mean for the banking industry

In early 2020, when the coronavirus pandemic hit, millions of people lost their jobs and millions lost their working hours. As the federal government launches its financial aid program, banks are encouraged to temporarily cancel overdrafts and insufficient funds.

Many banks and lenders (but not all) have complied with the regulations. Bank of America, JP Morgan Chase, and Wells Fargo have all reported overdraft fees to exceed $ 1 billion in 2020. US Outlook.

Even in banks and credit companies that waive overdraft fees in 2020, these measures have always been seen as temporary. Until June 3, 2021, Ally Bank has announced that it will permanently end overdraft and insufficient funds charges.

Most banks charge a fine of $ 25- $ 35 per transaction, so a consumer who needs overdraft protection on a busy but bad day, say, five times. You can see how these costs add up. Before the pandemic, Ally was calculating fines per day ($ 25), not per transaction.

What does no overdraft charge mean to you

“No Overdraft Fee” This means that consumers will not be penalized for overdrawn accounts.

It doesn’t mean that you can spend as much money as you want.

According to the Federal Reserve Bank of San Francisco In 2019, the proportion of consumers using debit cards to shop and pay was 28%. The percentage of them using credit cards for payment is 23% and the percentage of using cash is 26%.

Paying by Check This is how most consumers find out about their accounts, as debit cards rarely allow consumers to spend more than their account amount. In 2018, check payments made up only 8.3% of non-cash payments.

Most banks that charge overdraft fees do not offer a time limit for customers to meet their financial obligations. Although some banks offer customers a 24-hour deposit window to pay overdrafts without penalty, most banks do not.

Ancient history of discovery (for example, 18 months ago)

Before the pandemic, almost as long as banks existed, banks had found a way to charge customers who tried to spend more than their account balances.

Either they charge an overdraft fee (in some cases the cost of each overdraft is between US $ 25 and US $ 30), or they charge clients for “overdraft protection”, which provides financial protection for overdrafts. , although customers still have to pay. the money they spend on the account balance. The average overdraft protection fee is between $ 30 and $ 35 per month.

According to data from the Consumer Financial Protection Bureau, Bank of America earns an average of $ 17 billion a year from overdraft fees.

Expenses for financially disadvantaged groups

The main problem with overdraft fees or overdraft protection is that those who cannot afford it need it most: people with low checking account balances or people who live on a salary.

The Consumer Financial Protection Bureau estimates that 30% of bank customers overdraft their bank account each year. This 2021 Financial Health Spending Report. Ninety-five percent of consumers who reported overdrafting were considered “economically vulnerable” and a high percentage of those consumers were black or Latino.

Recent history of discovery (since the pandemic)

In the digital age, consumers can “bank” without worrying about overdrafts and insufficient funds, but only if they don’t use paper checks. Fintech applications such as desire with chimes and update up to date account information, they are also hard to overdraw.

Likewise, Discover Financial does not charge overdraft fees, but the Discover Financial and fintech applications are not legally “banks”.

Banks have to be officially licensed by the federal government, and Ally is like that. Banks provide checking and savings account services and are allowed to make a profit. It is the source of overdraft protection and fees.

Kent McDill is a senior journalist who has focused on personal finance topics since 2013. He is a writer for The Penny Hoarder.