Big banks charging Americans millions in 'exploitative' overdraft fees are about to see a crackdown from Biden's top consumer watchdog

• The CFPB announced it would be scrutinizing banks that heavily rely on overdraft fees.
• Banks charge overdraft fees to protect themselves when a customer's spending exceeds their balance.

Overdraft fees are intended to be a safety net, but for whom?

It turns out that banks make big profits off the overdraft fees they charge consumers to ensure their purchases won't be denied if their spending exceeds their balance.

President Joe Biden's top consumer watchdog wants to put an end to that.

On Wednesday, the Consumer Financial Protection Bureau (CFPB) announced it would begin investigating banks that heavily rely on overdraft fees. The bureau published two reports that found big banks continue to rely on those fees as sources of revenue and totaled $15.5 billion in 2019 across the industry, and the customers who get hit hardest with those charges are often the ones who can least afford them.

"Rather than competing on transparent, upfront pricing, large financial institutions are still hooked on exploitative junk fees that can quickly drain a family's bank account," Rohit Chopra, director of the CPFB, said in a statement.

"Upfront pricing that appears to be 'free,' but is offset by opportunistic penalties that take advantage of complex rules and captive customers is not the sign of a competitive market," he added.

Chopra explained that while overdraft fees were created in the "spirit of convenience," they quickly became the "bread and butter sources of revenue" for many banks and put consumers in a financial bind. As a result, the CFPB will be taking three separate actions: it will take action against banks whose overdraft charges violate the law, it will prioritize examinations of banks that are heavily reliant on overdraft fees, and it will look into new technology to give consumers the power to leave poor-performing banks.

Right before the CFPB announced its crackdown, Capital One announced on Wednesday it would get rid of all fees for overdrafts starting early next year, becoming the biggest bank in the US to announce such an action. It will still allow its customers to get free overdraft protection on their accounts.

Lawmakers have also been holding banks in their sights for overdraft fees. Insider reported in May that Massachusetts Sen. Elizabeth Warren grilled JPMorgan Chase CEO Jamie Dimon during a hearing over the bank collecting $1.5 million in overdraft fees during the pandemic, calling him the "star of the overdraft show."

A JPMorgan spokesperson told CNN on Wednesday that the CFPB's report did not reflect changes the bank had already made this year, which included eliminating the non-sufficient funds fee and increasing the amount a customer can overdraw before fees are charged.

Still, Warren wants other banks to follow in Capital One's footsteps and ensure hefty overdraft charges are a thing of the past.

"Bank overdraft fees snatch billions from struggling families & even during this pandemic, big banks raked in billions from this abusive practice," Warren wrote on Twitter. "This is a good move by @CapitalOne. Big banks like @JPMorgan should do the same."