You have two days until payday but only one day’s worth of gas to get to work. We believe charging you a $35 fee to make ends meet is wrong. We believe doing that over and over to collect $34.5 billion last year in overdraft fees in also wrong.
In a move to help millions of Americans gain access to a fee-free safety net to do things like cover gas or buy groceries, today we announced Varo’s No Fee Overdraft. You read that right. No fees to overdraft up to $50 (excluding ATM withdrawals and over-the-counter withdrawals) when a customer meets and maintains certain eligibility requirements, and enrolls in the program.*
For some consumers this represents cost-savings of up to hundreds of dollars in fees each year. It also marks a shift in how we — the new generation of banking — understand customers better. We understand that payday and bills don’t always line up and having a $50 cushion, when you’re good for the money, is a big help. That’s what No Fee Overdraft is all about.
Our recent Varo survey showed that 62% of people in their 20s and 30s had to give something up to pay for gas at least once in the last year. More than 40% of these people paid an overdraft fee. There is something wrong with the picture when the average person gets dinged with a $35 overdraft fee at their bank when they need a little help covering an expense.
It may seem like a pretty basic idea — but the best ones are often the simplest. Amazon has built one of the most valuable businesses on the insight that retail customers crave convenience; ours is that improving customers’ financial health is the future of banking. Overdraft fees do not help customer’s financial health. Full stop.
When we first launched Varo in July 2017, we designed the Varo Bank Account to not allow overdrafts at all. (A similar SafeBalance account at Bank of America costs $4.95 a month.) Since then, thousands of customers told us that they did want an overdraft feature — but one that was safe, and wouldn’t lead to a fee pileup. We went back to the drawing board, and created No Fee Overdraft for eligible customers. This is not simply sweeping money from one of your accounts to another or a line of credit — it’s allowing you to overdraft up to $50 and we don’t charge you a fee for it. When your next deposit hits your Varo Bank Account, it is automatically applied to your negative balance.
This innovation springs from our core mission to improve the financial health of every customer.
The hidden meaning of overdraft fees
Let’s dig deeper into the story of overdraft fees because they represent so much more than a simple fee. It’s really about how a system has nickel-and-dimed clients — and in particular those who can least afford it. It’s also emblematic of the breakdown in trust between hard-working Americans and the institutions that should be serving them.
As author Lisa Servon wrote about in her 2017 book The Unbanking of America, people are moving off the financial grid because they no longer trust big traditional banks to do the right thing by them.
And for consumers mistrust is, in many cases, well deserved. Last year, financial institutions raked in $34.5 billion in fees from Americans who were $50 short on average to complete a transaction. And those overdrafts were mostly repaid in three days or less. Over the last 10 years? That amount is nearly $370 billion in overdraft fees — the equivalent of the whole GDP of Ireland.
Patrick Picket, 23, was a Varo customer before he came to work here as an operations analyst in our Salt Lake City office. He tells a familiar story: “[My old institution] charged me a whole bunch of overdraft fees that far exceeded the amount my account was overdrawn. I tried a bunch of times to get them to just remove the overdraft protection and simply decline my account. …They wouldn’t remove the protection and would just overdraft it anyway, take it from my line of credit, AND still charge the fee.”
As Patrick’s story shows, it’s not just the fee itself that is problematic — it’s the way they pile up, the lack of transparency around how much they cost, and a total lack of empathy or action from the institution to help.
These fees also underscore a real misalignment between the banking industry and its customers who can least afford fees. Data from the Consumer Finance Protection Bureau show only 9% of bank accounts are the source for more than 70% of fee revenue. Those same accounts also represent the lowest FICO scores. How is this ethical?
Allowing a small overdraft costs the banks very little relative to the other costs the banks incur. That needs to stop. And we’re the ones to stop it.
Whether or not you’ve overdrafted once in your life — or multiple times — there is no doubt that the practice of paying a fee for being short on funds for a few days doesn’t feel right. While we have come to just accept that this is how banking is, it doesn’t have to be.
Instead, let’s imagine what putting a decade’s worth of overdraft fees or $370 billion back into the pockets of hard-working Americans look like. That would be $1,121 in every American’s pocket for starters. That’s better education, better healthcare, less stress, more opportunity. It’s helping to bring more people back to the middle, rather than pushing them to the edges.
We are drawing from behavioral economics, inclusive design, and machine learning to create a banking experience that not only does all the stuff that traditional banks do with no fees (e.g. offer a premium bank account) but also helps people manage their money and improve their financial health — based on real, everyday modern-life needs.
Our goal at Varo is simple: to build a bank that actually helps.
Colin Walsh is a reformed banker and CEO of Varo Money.
Varo Bank Account Services provided by The Bancorp Bank; Member FDIC.
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