Banks earn billions of dollars charging overdrafts fees, and the burden falls on those least able to afford it

• In 2019, big banks collected more than $11 billion in overdraft fees.
• But the burden of those fees disproportionately falls on those who can least afford them.
• The amount of bank fees paid varies widely by race, ethnicity, and gender.

If you've ever used an out-of-network ATM or overdrawn your checking account, you were probably charged a fee.

These fees are a small but important source of revenue for retail banks, including some of the country's largest.

According to Federal Deposit Insurance Corp. data and quarterly reports, the nation's top five largest banks - JPMorgan Chase, Bank of America, Wells Fargo, Citibank, and US Bank - earned, on average, more than 10% of their consumer and business banking revenue from deposit-related fees (encompassing all service charges on an account) in 2020.

But banking fees - particularly overdraft charges - don't affect all Americans equally. Overwhelmingly, overdraft fees are paid by those with the lowest balances in their checking accounts. In 2019, banks with more than $1 billion in assets collected more than $11 billion in fees, according to the Center for Responsible Lending.

"If you don't have savings, you don't have a revenue, if you don't have the same kind of wealth and income coming in, it's going to be difficult for you to maintain the structures and the fees and those commitments, those financial obligations, that really are necessary in order to have a bank account," Agatha So, an economist at Latino advocacy organization UnidosUS, told Insider.

The 8% of consumers who overdraw their checking accounts more than 10 times a year pay 74% of all overdraft fees nationally, according to one Consumer Financial Protection Bureau report from 2017.

And a 2019 Bankrate survey found that Hispanic bank customers pay more than three times as much in checking account costs per month ($15.85) as white customers do ($5.29). Black Americans pay more than double ($12.30) in checking account costs compared to white customers.

"We see this pretty plainly as a racial-justice issue," Peter Smith, a senior researcher at the Center for Responsible Lending, told Insider, adding: It's "just another layer of what is happening in so many ways."

The fees customers pay are ultimately just one reflection of broader, systemic inequities in generational wealth and access to banking services and capital, Smith said - a problem that has only grown in the years since the Great Recession.

The imbalance in who pays these fees extends beyond race and income

Disparities in who pays bank fees extend beyond race and ethnicity to include gender as well. But measuring the effects of fees by gender is more complicated, since such disaggregated data can be hard to come by outside of surveys.

Smith said that the Center for Responsible Lending often encounters single mothers - and particularly single mothers of color - that face difficulties in banking.

One 2019 survey conducted by the personal-finance startup Stash found that women, on average, pay 18% more in banking fees than men do - a gap that only widened among lower-income respondents, where women who earn less than $25,000 a year pay 23% more than men do.

And while it might seem that the rise in no-fee bank options - particularly among new banking upstarts promising to upend traditional consumer finance - might make bank fees obsolete, in some ways they're actually having the reverse effect. They create competitive revenue pressures for established players.

"While I'm certainly not going to point to free checking as a problem in and of itself, I will say that the kind of marketplace expectations of free checking led to banks scrambling to find other ways to backfill revenue," Smith said.

The average overdraft fee in 2020 was $33.47, according to a Bankrate study, which noted that the fee is the highest it's ever been in the 23 year history of the annual study.

Banks have transitioned over time, according to Smith, from charging non-sufficient fund fees as a "penalty" mechanism - like a bounced check charge that won't be covered by the bank and is ostensibly meant to change the behavior of a customer - to viewing overdrafts as an ongoing revenue source, where the bank will cover the difference as essentially a loan and charge a fee in the meantime.

That being said, market pressures are having an effect, as some of the nation's largest banks now do provide variations of no-fee checking accounts and overdraft protection. In June, Ally Bank announced it was eliminating its overdraft fees, citing the fact the majority of those penalities impacte lower-income customers.

In April, for example, PNC became the latest large bank to implement a new overdraft policy by announcing the launch of what it calls "Low Cash Mode." The policy will allow customers to decide whether a check or debit-card transaction is processed in the event of a potential overdraft. Citi's Plex account, launched through Google Pay, also won't charge customers any fees, including overdraft.

For his part, Smith said responsible regulations centered on fees would ensure charges are proportional to the size of the overdraft. This would ensure that a $35 fee won't be assessed on a $1 transaction, for example. The Center for Responsible Lending has also advocated for regulation that would limit the number of fees a bank could charge customers per year.

The last major federal overdraft protection rule was implemented at the height of the Great Recession, in 2009, when the Federal Reserve instituted a regulation that banks must allow customers the option to opt out of overdraft services.

"The best hope at this point is for the CFPB to take strong and decisive action towards making these practices fairer and more protective of customers," Smith said.