Why that $5 latte is now less likely to cost you overdraft fees

(Romeo Ranoco of Reuters)
(Romeo Ranoco/Reuters)

Remember the public backlash a few years ago over the infamous $40 latte? People got tired of banks hitting them with $35 fees for overdrawing their accounts by as little as $5 for a cup of coffee. The outcry sparked a series of lawsuits and regulatory changes, but not an outright ban on the practice.

It turns out, however, that many of the country's largest banks have made some strides in reducing your chance of getting hit with an overdraft charge.

A new report from research firm Moebs Services found that 52 percent of banks with assets of more than $50 billion — including JPMorgan Chase, Wells Fargo and Bank of America — have what's known as a "de minimis" balance, a threshold for overdraft. If you overdraw your account by $6 at a bank with a $8 de minimis, you won't get hit with a fee.

Moebs Services says more banks waiving overdraft fees.
Moebs Services says more banks waiving overdraft fees.

The threshold varies from $1 to $50, with higher balances at banks that are more competitive in their quest to get checking accounts, according to the study. Researchers say the national average is $7.40, with more than a quarter of national banks using that de minimis amount.

Only 10.8 percent of credit unions offer this type of overdraft buffer. They have fewer accounts and are more likely to contact a customer directly about an overdraft, said Mike Moebs. Smaller institutions, he noted, often don't have the technology needed to offer such a service.

Nearly two thirds of big banks are also limiting how many times a customer can be hit with overdraft fees in one day. Researchers found that caps ranged from as little as two fees to as high as 12 in one day.

All of these changes to the ways banks assess overdraft fees are a far cry from six years ago. Back then, there was minimal transparency in the process, which let banks hit consumers with a flurry of charges and pay transactions in a way to maximize fees. Less than 1 percent of banks even had a de minimis balance in place at the time, Moebs said.

Things started to change four years ago after a series of consumer lawsuits against banks for wrongful overdraft charges brought a lot of attention to the problem. Those cases led to some significant changes in the ways banks handled overdraft charges, as did federal regulations in 2010, which forced banks to ask consumers to opt into overdraft services.

Bank of America eliminated overdraft altogether after spending $410 million in 2011 to resolve a related case. JPMorgan Chase stopped charging overdraft fees for transactions under $5 shortly after agreeing to pay $110 million to settle a case in 2012.

Regulation and litigation aren't the only driving forces behind overdraft changes, Moebs said. Traditional banks are facing increased competition from Wal-Mart, T-Mobile and a host of other retail, tech and telecom companies. These upstarts are edging into banking territory with prepaid debit cards that customers can use to pay bills, make purchases and deposit checks via a smartphone camera.

Now banks are racing to keep the competition from stealing their customers. Although banks usually make no money from checking accounts, they still view it as a crucial tool for establishing a relationship with consumers, Moebs said. As a result, he suspects more banks will look for ways to enhance customer loyalty.

Danielle Douglas covers the banking industry for The Washington Post.
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