4 Ways Bank Fees Steal Your Wealth & How to Avoid Them

$11.45 billion.

That's how much Americans paid in overdraft fees in 2017¹. Meanwhile, the average ATM fee has reached an all-time high at $4.72 while the average overdraft fee reached a whopping $33.36 per transaction².

Why are consumers paying so much money in bank fees?

Two reasons.

First, overhead costs.  Each service — including branch locations, ATMs, and friendly bank tellers — costs money to provide. Traditional banks cover the cost of these services by charging you fees.

Regardless of whether or not you use your bank's physical locations, your money is paying for their staff and maintenance.

Second, profitability. Fees make money.

Lots of it.

In 2016, America's three largest banks — Bank of America, Wells Fargo, and Chase — earned $6.4 billion in ATM and overdraft fees. That's $300 million more than what they earned in fees during 2015.³

With fee revenue rapidly increasing every year, banks have no incentive to reduce their fees.

Here's why you shouldn't pay fees.

First, your money allows banks to earn enormous profits.

When you deposit money into a checking account, your bank uses that same money to create loans. When your bank collects interest from its loan customers, it pays you a share (interest) as a way of thanking you for the privilege of using your money to make even more money.

However, because deposits typically earn zero to little interest, you're essentially giving your bank an interest-free loan that it uses to make incredible profits.

And how does your bank repay you?

By charging you fees.

Your money allows banks to earn enormous profits.

Second, bank fees negatively impact your wealth. $3 here and $10 there may not seem like much money at first glance. Over time, however, these fees will add up and take large chunks out of your hard-earned cash.

Let's take a look at Ben and Charlotte, two hypothetical banking customers.

Ben has a checking account at a traditional bank, which rewards him with 0.04% Annual Percentage Yield. Because $1,000 is below the bank's required minimum balance, he pays $10 per month in service fees.

Charlotte, on the other hand, uses a digital bank. Her checking account has no service fees or minimum balance requirements. Because the bank is digital — and has less overhead costs — she earns 1.00% APY.

Let's take a look at how their $1,000 deposits change over time (for simplicity's sake, we'll keep the $1,000 constant):

After only one year of banking, Ben lost $119.63. That's a 12% reduction of his money. Meanwhile, because Charlotte chose a bank with no fees and high interest, she instead gained $10.05.

By keeping a close eye on your money and avoiding fees wherever possible, you will preserve your wealth instead of allowing banks to chip away at its value.

In this article, we'll review four of the most common bank fees, plus tips on how to avoid them.

Overdraft Protection or Non-Sufficient Funds (NSF) Fees

Accidents happen.

Perhaps you spent a lot of money over the weekend and forgot about a previously scheduled bill payment. As luck would have it, the bill exceeds your available funds.

In a perfect scenario, your bank would reject this payment and continue on its merry way. Unfortunately, this is not the case.

Your bank — if it is traditional — will likely charge you an overdraft protection or NSF fee.

Overdraft protection is a service banks offer to prevent you from failing to complete a payment. If you authorize a payment — without enough funds to cover it — your bank will essentially give you a loan for the remaining amount.

Of course, this service does not come without a fee.

According to the Consumer Financial Protection Bureau, overdraft protection is comparable to a short term loan with 17,000 APR.

Whether you are short $5 or $500, the median fee for each overdraft protection is a whopping $34. According to the Consumer Financial Protection Bureau (CFPB), this is comparable to a short-term loan with 17,000% APR.⁴

Thanks to a 2010 law, overdraft protection programs are required to be opt-in only. Unfortunately, this new law only applies to transactions that are not pre-authorized.

If you pre-authorize a payment without the funds to cover it — including automatic bill payments or checks — overdraft fees may still occur.

NSF fees are similar to overdraft protection fees. Instead of covering the cost of the over-drafted amount, however, your bank will reject the payment outright (and still charge you a fee).

How to Avoid Overdraft and NSF Fees

First, check to see if your bank has overdraft protection. If it does — and charges you for it — opt-out immediately.

Next, keep a small amount of money ($100 - $500) in your checking account at all times or link your checking account to your savings. While you may not be able to opt-out of NSF fees, having a small amount of money in reserve will help you avoid most overdraft situations.

Finally, search for banks that do not charge you for overdraft protection or non-sufficient funds. For example, the Axos Bank Essential Checking account never charges fees. That means no maintenance fees, no overdraft or NSF fees, and no monthly minimum balance requirements. We even deposit your paycheck up to two days early with Direct Deposit Express.

Instead of charging you fees, perhaps your bank should instead reward you for the privilege of profiting from your hard-earned cash.

Monthly Service Fees and Minimum Balance Requirements

In addition to overdraft fees, many banks will also charge you a fee for keeping your account open. Often called "service" fees, they range from $10 - $15 per month.

Most banks will waive this fee if you keep the minimum required balance (usually $1,000 - $5,000).

Here's why this is a problem:

First, by requiring you to keep a minimum balance at all times to avoid a penalty, your bank is removing your ability to access your own money.

Second, by forcing you to keep a certain amount of money within your checking account, your bank essentially guarantees its own access to a zero-interest loan. As we discussed earlier, your bank then uses your money to profit from its own loan customers.

Instead of charging you fees, perhaps your bank should instead reward you for the privilege of profiting from your hard-earned cash.

How to Avoid Monthly Service Fees

The simplest way to avoid monthly service fees is to keep the minimum required balance. However, if you want the ability to access all of your money at any time, there are other ways to avoid this fee. Many banks will also waive the monthly service fee if you set up regular direct deposits. Banks like direct deposits, as it provides them with a regular stream of income.

Banks will also waive fees if you make a certain amount of debit card transactions. Because banks charge merchants fees for processing card transactions, they earn more money when you use your debit and credit cards often. Of course, you can also shop around for a new bank. In the age of digital banking, many online banks forego all monthly service fees and minimum balance requirements.

If you value your time (and gas), find a bank that reimburses you for ATM fees.

ATM Fees

ATM fees occur when you withdraw money while using any ATM that is outside of your bank's network. There are two types of ATM fees: operator fees and non-network fees.

Non-network ATMs charge operator fees, which range from $2 to $5 per withdrawal. (Unless, of course, you use a non-bank ATM, such as the notoriously steep casino ATMs.) The non-network ATM will always ask you to accept the additional surcharge before you withdraw any money.

On top of operator fees, your own bank may also charge an additional non-network fee. These usually range from $2 to $4. Unlike operator fees, however, customers will not get notified about additional fees until they read their bank statement after the fact.

How to Avoid ATM Fees

It isn't uncommon to see an unfortunate banking customer drive across town in search of an in-network ATM. However, if you value your time (and gas), you can always shop around to find a bank that reimburses you for ATM fees.

For example, many of Axos Bank's checking accounts provide an unlimited reimbursement of fees imposed by any domestic ATM.

Wire Transfer Fees

Sometimes you need to send money right away. Perhaps rent is due and you forgot to mail your check to your landlord ahead of time. Regardless of your particular situation, sending an immediate wire transfer will typically cost up to $30.

Are you on the receiving end of a wire transfer? Unfortunately, many banks will still charge money for receiving an incoming wire transfer.

How to Avoid Wire Transfer Fees

With the rise of online peer-to-peer (P2P) payment platforms — including PayPal, Venmo, and SquareCash — customers can bypass the wire transfer altogether. And, because many P2P transactions take 24 hours (the same amount of time it takes to complete a wire transfer), you can use these platforms without incurring late penalties.

Understanding the flexibility that P2P payments offer, many banks have incorporated their own programs. Be sure to check with your bank to see if it offers its own (non-fee inducing) digital P2P platform.

If your payments are recurring — such as rent or bill payments — you can also automate your bill payments (and save the effort of having to remember to pay your bills on time). For example, Axos Bank's online banking allows customers to schedule regular, automatic payments to any person or company.

Always Shop Around

You don't have to settle for exorbitant fees.

Thanks to the rise of digital banks — which have fewer overhead costs, and therefore fewer fees — you have many options when choosing where to deposit your money. Because digital banks are also FDIC-insured, your money is safely insured for up to $250,000 per depositor.

Don't waste your hard-earned money on paying for your bank's electricity bills. Watch out for hidden fees and always shop around to find a bank that works for you.

Footnotes

1. Report: "FDIC Data Shows that Banks Collected $11.45 Billion in Overdraft Fees in 2017," Center for Responsible Lending, August 7, 2018.
2. "Bank Fees Around the U.S. Climb to Record Highs," CBS News, October 2, 2019.
3. Long, Heather, "Big Banks Rack up $6.4 Billion in ATM and Overdraft Fees," CNN Money, February 22, 2017.
4. "CFPB Finds Small Debit Purchases Lead to Expensive Overdraft Charges," Consumer Financial Protection Bureau, July 31, 2014.

4 Ways Bank Fees Steal Your Wealth & How to Avoid Them

This blog post was published by Axos Bank on August 31, 2018 and last updated on October 2, 2019.