The Biggest Bank Yet Has Announced It's Eliminating Overdraft Fees

Starting this summer, Citibank will eliminate all overdraft fees, returned-item fees and overdraft-protection fees, the company announced Thursday. 

Citigroup, which has some $1.7 trillion in assets, is the first of the "big four" banks to entirely eliminate overdraft fees, charged when a customer withdraws or charges more than they have in their account. 

In December, JP Morgan Chase eliminated its returned-item fee and increased its overdraft "cushion" from $5 to $50. A month later, Wells Fargo and Bank of America both announced they were eliminating fees for bounced checks, also called "non-sufficient funds charges," and BoA said it was trimming its overdraft charge from $35 to $10. 

Gonzalo Luchetti, CEO of US Personal Banking at Citi, said the decision to do away with the fee altogether was a "significant step for Citi as a leader in the banking industry." 

Find out what CitiBank is doing, which other institutions are also cutting overdraft penalties, and how you can avoid them in the first place. 

What is an overdraft fee?

An overdraft fee is a financial penalty your bank charges you when you spend more money than you have available in your account.

For example, if you have $50 in your checking account and buy a $100 item, your bank may clear the transaction but charge you an overdraft fee because you were $50 short. It will also take the remaining $50 you owe when you make another deposit.

Overdraft fees are a subset of "non-sufficient fund" (NSF) fees: If your bank returns the presented payment -- say, a check -- without covering the amount, you're generally charged an NSF. The fees vary, but typically you're looking at $30 per overdrawn transaction, according to the Federal Deposit Insurance Corporation. 

If one overdraft charge causes another transaction to come up short, you can be hit with multiple fees all at once. And the fine is fixed, whether your account was short $1 or $100.

Banks that have eliminated or decreased overdraft fees

PNC, the seventh-largest bank in the US, kicked things off in April 2021 when it rolled out Low Cash Mode, which enables customers to decide when the bank should pay for items if their account balance is insufficient. It also gives you more time to add money before an overdraft fee is charged. (The bank also capped overdraft fees at one per day and ceased charging insufficient funds fees.)

That June,Ally Bank announced it was permanently eliminating all overdraft fees after waiving them temporarily amid the COVID-19 pandemic. 

In November, Santander Bank said it was lifting overdraft fees for accounts overdrawn by $100 or less. It also reduced the number of returned item fees from six to three. (Santander doesn't charge to transfer funds into an overdrawn checking account from another linked account.)

In December, Capital One announced it was eliminating all overdraft and non-sufficient fund fees for its consumer banking customers in early 2022. (The company, which already offers free overdraft protection, has not announced an exact date yet.) 

That same month, JP Morgan Chase eliminated its returned item fee/non-sufficient funds fee and increased its overdraft "cushion" from $5 to $50. The country's largest financial institution added that later this year, it will offer customers a full day to cover an overcharge and give them early access to direct-deposit paychecks. (A Chase spokesperson told CNET the company hasn't announced a date for these new features to go into effect yet.) 

Bank of America got rid of bounced checks fees in February 2022. In May, the company will reduce the penalty for overdrafts from $35 to $10 and eliminate the transfer fees for overdraft protection. 

Wells Fargo eliminated its bounced-check charge -- as well as the fee for overdraft protection -- in March 2022. The bank will also give customers a 24-hour grace period before imposing an overdraft fee and allow them to access direct-deposit payments two days early.

Mary Mack, Chief Executive Officer of Wells Fargo Consumer and Small Business  Banking , said that the changes "give our customers more choice and flexibility in meeting their needs."

Discover, Chime, Axos and Aspirationall offer checking accounts with no overdraft fees.

As recently as January, Citibank demurred about cutting fees: Jennifer Bombardier, director of personal banking public affairs, would only tell CNET that the money Citibank collected from overdraft fees "is among the lowest compared to our peer set."

Bombardier added Citibank already declines ATM and point-of-sale debit transactions when the money is not available, and processes checks from the lowest dollar amount to the highest, minimizing the impact of an overdraft. 

But last week, the company announced it was completely nixing overdraft fees, as well as overdraft-protection and non-sufficient funds (NSF) fees, this summer. When the policy takes effect, Citi will be the largest US institution to fully eradicate such fines, and the only of the top five -- Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp. 

How much do banks make on overdraft fees?

The nation's top banks generated some $4 billion from overdraft fees last year, Sen. Elizabeth Warren, a Democrat from Massachusetts, said in a Senate Banking Committee hearing in May 2021.

Almost 10% of Americans overdraw their account more than ten times a year, according to the Consumer Financial Protection Bureau, a governmental consumer-watchdog group. That group accounts for approximately 80% of all overdraft and non-sufficient funds fees.

"They most often get charged to low-income customers, so they hit the people who can least afford to be in that situation," Varun Krishna, senior vice president and head of consumer finance for Mint and Intuit's Consumer Group, told CNET. "The person who gets hit with an overdraft on a $5 Starbucks latte can't afford a $30 overdraft fee."

One overdraft fee can start a cascade, throwing a person's entire finances out of whack. "They think maybe I need a paycheck advance, and that opens up a whole new set of financial problems," said Krishna.

And the penalties keep rising: In 2000, the average overdraft fee was $23.74, according to a Bankrate study. In 2021, they cost $33.58 on average. 

Why banks are eliminating fees

Banks aren't typically known for doing things out of the kindness of their heart. Krishna says the trend is likely spurred by a variety of motives, including good PR and a desire to stay competitive.

"A lot of customers shift around between the bigger banks, so they try to keep up with their offering," Krishna said. "But if you want to innovate you need to think a few steps ahead – I think we might see even more changes coming." 

There's also a desire to avoid government intervention: In 2021, both the House and Senate proposed bills to limit overdraft fees. 

In January, the Consumer Financial Protection Bureau announced it was targeting financial institutions that are dependent on exploitative and excessive "junk fees." It encouraged consumers to file complaints if they feel they've been subject to unfair fees by their bank or credit card company. 

Bank of America is facing a lawsuit by two customers who say it refused to honor a pledge to refund overdraft fees to clients facing financial hardship during the COVID-19 pandemic.

"Overdraft fees should have been improved a long time ago," Krisnha said. "The reason they haven't is that they've been able to make a profit off misfortune. But they have to get off of these predatory practices. You have new players that don't charge these fees. But it's like a drug -- it's hard for them to quit."

How to avoid overdraft fees 

Besides moving your money to one of the banks that has eliminated overdraft fees, you can always opt out of them: According to the CFPB, if you don't agree to overdraft charges, transactions that exceed your available balance will simply be declined.

It's not a fool-proof option, though: If you write a check that bounces and is returned by the merchant, your bank or credit union will likely still hit you with a non-sufficient funds fee.

There are other strategies to make an overdraft less likely, such as signing up for low-balance alerts. Mint offers an overdraft early warning system independent of your banking system, Krishna said.

You can also link your checking account to your savings account – so funds can transition from one to the other if needed – or link your checking account to a line of credit. You may still have to pay a fee and interest -- but it's usually less than an overdraft fee, according to the CFPB.