About 40% of millennials say they were hit with at least one overdraft fee last year, according to a recent survey by Qualtrics of over 1,000 adults ages 23 to 38. But one app wants to change that.
Mobile banking app Varo is rolling out a "no-fee overdraft" service on Tuesday that will help customers avoid extra fees when their bank account hits $0. Banks typically charge overdraft fees when you use your debit card and your account balance is lower than the amount you're spending. Instead of having your card declined, your bank will cover the difference and charge you an overdraft fee, usually around $30 to $35.
With Varo's service, customers who make at least five debit card purchases a month and set up direct deposits of at least $1,000 per month will be able to overdraft up $50 without any fees or interest. The average overdraft amount among Americans is about $50, according to the Consumer Financial Protection Bureau.
"The vast majority of overdraft fee revenue came from customers who can least afford it," Colin Walsh, CEO of Varo Money, said in a statement. "We understand that having a safety net to pay bills and stretching a paycheck is important."
Overdraft fees brought in $34.5 billion in revenue for financial companies last year, according to financial research company Moebs Services. And these charges, unsurprisingly, are one of the most complained about bank fees. Roughly 1,200 customers lodged complaints about overdraft policies to the Consumer Financial Protection Bureau's database during the first half of 2019.
The fees you pay your bank may seem small, but they can add up over time. Of those who overdrew their bank account last year, 41% admitted to paying more than $100 in fees as a result, according to the survey Qualtrics fielded on behalf of Varo. About 15% reported paying more than $200.
Varo, which launched last year, is focused on offering accounts without high fees. Currently, the mobile app has no-fee bank accounts, high-yield savings accounts and personal loans.
Walsh, who has spent his career working at companies such as American Express, Lloyds Bank in London and Wells Fargo, said in an interview with Forbes that Varo aims to help people save, adding that banking should be being low-cost and accessible to everyone. The Bancorp Bank currently provides the app's banking services and FDIC insurance, although Varo has been granted preliminary approval for a national bank charter.
But you don't have to be a Varo customer to avoid overdraft fees. You can decline your bank's "overdraft protection" and you will not have to pay a fee. Instead your card will just be declined when you attempt to overdraw your account.
Of course, there are some restrictions. You can only opt out of overdrafts on one-time transactions made with your debit card. So if you use checks, or if you have recurring payments set up and you go over your current checking balance, you may still be charged an insufficient funds fee.
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