With technology now such an intrinsic part of our culture, the banking industry has had to adapt to changing times, offering new features to enhance convenience and mobility for customers. However, while the tools we use to bank continue to evolve, some elements of banking have remained omnipresent for centuries. Take the concept of a bank overdraft. They’ve existed since at least the 1700s, though you’re probably not alone if you struggle to grasp precisely what an overdraft fee is. Many consumers still struggle to understand how bank overdrafts work and what options are available to them.
All the while, the banking industry is, well…banking on this fact. In 2016, the nation’s three biggest banks — Bank of America, JPMorgan Chase and Wells Fargo — brought in more than $6.4 billion based purely on ATM and overdraft fees, according to a CNNMoney analysis. Clearly, overdraft fees are a growing concern for both consumers and businesses alike. The decision to bank with a given institution could invariably lead to banking issues, and those could muck up the course of your business. So let’s take the topic of overdraft fees head-on, starting with a better glimpse at exactly what they are and how they affect you.
Bank Overdraft Fees and Your Business
In general terms, a bank overdraft occurs whenever a transaction moves an account balance lower than zero. For example, if an individual makes a purchase on their check card without having the requisite total in their account, the bank automatically flags this as an overdraft, but still allows the purchase in question to be completed. Often, an overdraft amount is only permitted to extend to a preset total, though this depends on the financial institution.
The overdraft is, in essence, a loan from the bank until you can add funds to your account and restore a positive balance. It’s not uncommon for overdraft loans to be accompanied by some form of interest, but perhaps the most common consequence of an overdraft is the overdraft fee. This is associated with a popular service known as overdraft protection, which gives account holders the opportunity to avoid an instance of “insufficient funds” (where their cards would be declined outright).
If you’re unsure whether you have overdraft protection on your business accounts, reach out to your financial institution. More and more banks only activate this feature at the request of customers. Naturally, the amount of these overdraft fees and the frequency with which a bank charges account holders fluctuates dramatically, from total daily possible costs in the hundreds of dollars to more manageable one-time fees. Nevertheless, fees of any size can add up. So we caution business owners not to rely too heavily on the safeguards that overdraft protection can provide.
Although some banks choose to cover customers’ overdrafts themselves, frequent use of overdraft protection can cost you a ton of money and adversely affect your credit score. Some banks offer the option to connect a credit card account to the overdraft. While this sounds great in concept, the reality could wind up causing more problems than it’s worth. Bottom line: Overdraft protection is a powerful tool, but only when implemented wisely. Be careful not to abuse it.
Low-Cost Overdraft Options
No one plans to face overdraft fees, but small businesses like yours need to be prepared for the unexpected (especially in their first years of operation). To that end, you should seek out a bank that has reasonable overdraft fees and policies so your business’ livelihood is never placed in jeopardy. Here are just a few of the best banks with low-cost overdraft fees, ranked in reverse order of their per-item overdraft fee (highest to lowest):
7. Alliant Credit Union
This self-proclaimed “not-for-profit financial cooperative” considers its members and owners one and the same. For consumers concerned about overdraft fees, Alliant Credit Union sticks to a tried-and-true rule of $25 per item. However, with no discernible maximum number of charges in a single day, overdraft fees can add up quickly. Translation: Don’t let the low per-item total lead you down a road of completely avoidable overdraft fees.
6. Nationwide Bank
Focusing on both insurance and financial services certainly hasn’t stopped Nationwide Bank from offering some of the lowest overdraft fees out there. The bank offers customers $25 worth of overdraft coverage for each item, with a maximum of six charges in a single day. At first glance, that possible $150 total might seem like a lot, but considering the industry as a whole, Nationwide’s overdraft policy is fairly competitive.
5. Boeing Employees Credit Union
In many cases, going with a credit union is the best option for small businesses, and Boeing Employees Credit Union is a testament to that fact. Customers are charged a $25 overdraft fee for each item (a common figure, it seems) at a maximum of five times a day. That’s a $125 total possible cost daily. The rare occasion might not decimate your business, but consider what would happen if overdrafting became your norm. Now it should be clear why we only recommend overdrafts in emergencies.
4. USAA Bank
For nearly a century, USAA has been serving military families, so it stands to reason that this dedication would translate into the bank’s overdraft policies. Thankfully, it does. While this bank offers the customary $25 per-item overdraft charge, it only allows a maximum of two fees in a given day. With a low possible daily total of $50, this is a solid option for account holders who want the ability to overdraft without the risk of incurring many large fees.
3. Ally Bank
Another company on the verge of celebrating 100 years of service, Ally Bank makes overdraft fees even simpler for its customers. Perhaps this is a factor in Ally’s much-touted customer focus. Regardless, the bank only allows a single overdraft fee of $25 per day. Once account holders exceed one item of overdraft, they aren’t charged more — even if multiple overdrafts occur in a day. This way, your business is protected from the possibility of escalating expenses.
2. Navy Federal Credit Union
Over 7 million members trust Navy Federal Credit Union to provide quality service, and its policies for overdraft coverage definitely reflect high standards. This institution offers a $20 overdraft fee for each item, with a maximum of three charges daily. When compared to other low-cost banks on our list, a mere $60 maximum is a benefit that small businesses like yourself will most definitely consider an asset.
Sure, Bank5 Connect — the online-only division of BankFive — may still give customers a $90 possible total for daily overdraft fees. But considering that this encompasses up to six overdrafted transactions, the value of this policy is unmatched on our list. With an overdraft fee of only $15, this bank’s figures are among the lowest we found…and by all accounts, Bank5 Connect has all the tools a small business will need from a more traditional banking destination. Just be sure to do your due diligence to ensure that Bank5 Connect is the right fit for your business.
Have any questions about how we can help you manage your small business’s finances? Let us know on Twitter @Revenued_com.
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