Banks have spent the past few years rolling back some of their most controversial fees — changes that, in theory, should ease the burden on financially strained households. Some major institutions, including Capital One, Citibank and Ally, have eliminated overdraft fees entirely, while others have reduced charges or added grace periods that limit when fees kick in.
But new research suggests those efforts to rein in overdraft fees still haven’t reached the people who need relief the most.
According to a new study by the National Bureau of Economic Research, or NBER, recent bank reforms aimed at easing overdraft penalties ended up disproportionately benefiting higher-income households, while financially vulnerable consumers saw little relief.
The study, which analyzed transaction data from tens of thousands of U.S. bank customers between 2018 and 2023, found that while the elimination of non-sufficient funds (NSF) fees — the charges banks impose when a transaction is declined due to insufficient funds — led to an immediate drop in those charges across all income groups.
However, by contrast, reductions in overdraft fees — which are assessed when a bank does cover a transaction that exceeds the account's balance — were modest, falling about 4.9% and largely limited to higher-income households.
The disparity comes down to how banks chose to change their policies. While NSF fees have largely been eliminated, most overdraft fee reforms have been incremental, raising the threshold when a fee kicks in or adding a grace period before charges are triggered.
But these kinds of adjustments help only if customers can quickly bring their balances back above zero or avoid triggering the fee in the first place. That's far easier for households with more cash on hand. For folks living paycheck to paycheck, even a small shortfall can still result in an overdraft fee — meaning these "intensive" policy tweaks often don't prevent the penalty at all.
"The overdraft fee policy changes created small allowances for depositors, like a 24-hour grace period," Sharada Sridhar, a co-author of the study and an assistant professor of finance at Georgia Tech's Scheller College of Business, tells Money. "Higher-income households are the ones who have enough resources to take advantage of these allowances — they have enough liquidity to utilize the 24-hour grace period."
By contrast, she adds, NSF fees were eliminated entirely, allowing households across the income spectrum to benefit equally.
But the effects don’t stop at overdraft fees. The NBER study finds that households that benefited from those changes — primarily higher-income consumers — also saw reductions in late fees, interest payments and reliance on high-interest borrowing like payday loans.
The researchers attribute those improvements to the policy changes themselves, finding that these outcomes fell sharply even after accounting for broader economic shifts such as changing interest rates over the same period. Their analysis, Sridhar explains, accounts for differences over time and across regions, which she says allows them to isolate the effects of the bank policy changes.
Lower-income households, on the other hand, saw little to no measurable improvement across those same indicators.
Overdraft fees hit vulnerable households hard
For years, consumer advocates have warned that overdraft fees function as a regressive penalty, ultimately affecting those with the least room in their budgets. As of 2023, research from the Consumer Financial Protection Bureau, or CFPB, found that 34% of households earning less than $65,000 were charged an overdraft or NSF fee in a given year, compared with just 10% of those earning more than $175,000. That same year, consumers across the board paid more than $11 billion in overdraft and NSF fees.
Efforts to rein them in at the federal level have also been uneven. A Biden-era CFPB proposal would have capped most overdraft fees at $5, but the rule was overturned last year by the Trump administration, which argued that it would lead to "reduced access to credit and important financial services.” As a result, banks largely remain in control of when and how these fees are charged.
Even as some major banks scale back some of these fees, the households most likely to incur them continue to see the least benefit.
Ads by Money. We may be compensated if you click this ad.Ad
More from Money:
Despite Reforms, Overdraft Fees Are Still Plaguing Low-Income Americans
Will Overdraft Fees Increase Under Trump? Here's What 7 Banks Told Us
I Got My Bank to Waive Overdraft Fees in 5 Minutes. Here's How
