In a bid to bring down costs for American households, the Biden administration has imposed new limits on the fees that banks can charge customers.

However, every policy action has a reaction. Now, leading consumer banks are revealing that in response to proposed regulations, they will impose new fees on bank account holders. This is the unintended, but likely, consequence of ill-advised banking regulation. 

What’s happening

Marianne Lake is the head of JP Morgan Chase Bank, the nation’s largest consumer bank and, reportedly, one of the biggest credit card issuers. In an exclusive Wall Street Journal interview, Lake warned that proposed regulations capping overdrafts and late fees would drive up banking costs for all Americans. Chase plans to pass on the costs of new regulations to customers by hiking charges for a number of free services, such as checking accounts and wealth-management tools.

The changes will be broad, sweeping and significant.

The people who will be most impacted are the ones who can least afford to be, and access to credit will be harder to get.

So, a few might pay less, but everyone will pay more.

Earlier this year, the Consumer Financial Protection Bureau (CFPB) proposed limiting bank overdraft fees, which they deride as junk fees, to as low as $3. Banks would be subject to stringent regulations on their overdraft programs unless they agreed to lower fees for customers. 

President Biden said in a statement at the time:

For too long, some banks have charged exorbitant overdraft fees—sometimes $30 or more—that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines. Banks call it a service—I call it exploitation. Today’s proposal would cut the average overdraft fee by more than half, saving the typical American family that pays these fees $150 a year. 

Rohit Chopra, the director of the CFPB, described the charges as a “junk fee harvesting machine.”

The proposed regulations would apply to the largest banks, and the agency claimed they would save consumers about $3.5 billion annually in fees. The agency is soliciting public feedback on plans for this rule to take effect in October 2025.

Capping so-called “junk fees” might sound like a good idea until you consider why banks charge overdraft fees and what the unintended consequences may be for all consumers, but especially those with the fewest means who depend on them.

How do overdraft banking fees work? 

Overdraft payments are similar to loans in that if bank customers spend more money than they have in their bank accounts, banks will process the transaction anyway, allowing the account to go into the red. The customers still have to pay back what they owe (to clear out that negative balance) and a fee.

According to Bankrate, in 2023, the average overdraft fee had fallen to $26.61, down 11% year over year. Overdraft fees are charged by 91% of accounts surveyed and can run as high as $38.

As for checking accounts, the same survey found that under half (45%) of noninterest-bearing checking accounts are free, meaning that they don’t charge a monthly service fee or require a minimum balance.

Most customers are able to keep their accounts in the green. Just 17% of households with a checking account reported paying an overdraft fee in 2022. Those who overdraft tend to be low-income Americans earning less than $30,000 a year and they tend to struggle to pay bills month after month. They would feel relief from capped overdraft fees, but all other customers would feel the pinch from newly imposed feeds. 

Megan McArdle opined in the Washington Post on why both customers and banks benefit from the overdraft system as is:

Well, as with any nice-sounding policy, it’s important to consider the alternatives, both for the customer and for the banker.

For depositors, overdraft fees can be an expensive alternative to even worse options, such as payday loans or having their electricity shut off (and paying a reconnection fee to turn it back on). And “the best of bad alternatives” can also be sort of true for bankers, who must find some way to defray the cost of providing what is basically an unsecured loan to people who are, as we’ve seen, often financially struggling and might be unable to repay the money. The fees also help pay for “free” checking (which costs banks quite a bit of money to provide). 

If we cap overdraft fees, how will banks make up the lost revenue?

Industry groups have pushed back, beginning with clearing up misinformation about overdraft fees.

The American Bankers Association (ABA) noted late last year that “a significant number of banks no longer charge overdraft and NSF fees, and 74% of consumers surveyed didn’t pay any overdraft or NSF fees in the last year.”

ABA explained that customers value overdraft protection:

A recent Morning Consult survey conducted for ABA shows exactly that. For the fourth year in a row, 9 in 10 consumers (88%) found their bank’s overdraft protection valuable, and nearly 8 in 10 consumers (77%) who paid an overdraft fee in the past year were glad their bank covered their overdraft payment rather than returning or declining payment. Sixty-three percent of consumers think it’s reasonable for banks to charge a fee for an overdraft, as opposed to only 24% who think it’s unreasonable.

Bottom Line

In response to proposed regulations, banks are likely to take proactive steps. They may lower their overdraft fees, but they have to make up the lost revenue in some way. 

As Chase Bank’s president warned, banks may charge for free bank accounts and/or implement new fees on other valued services. Either way, customers will end up paying more at a time of elevated prices and high interest rates, the opposite outcome than policymakers intended.