Ally decided to eliminate the fees after positive customer feedback when it temporarily suspended the charges in the early months of the Covid-19 pandemic, said

Diane Morais,

Ally Bank’s president of consumer and commercial banking. Last summer’s protests for racial justice also drove the decision to nix the fees, she said. The charges disproportionately affect people who are living paycheck to paycheck, Ms. Morais said, and the bank also studied research that found that overdraft fees disproportionately affect Black and Latino households.

“We came to the conclusion that these fees are a great source of stress and anxiety for consumers,” Ms. Morais said. “It became clear to us that the best way to relieve that anxiety was to eliminate those fees.”

Many big banks were lenient on overdraft fees when the pandemic hit, with most waiving the charges when customers asked for help. Last year, banks’ overdraft revenue fell for the first time in six years, according to financial-data firm Moebs Services Inc.

Still, firms collected $31.3 billion in the fees in 2020, Moebs calculates. Many analysts forecast an increase in overdraft fees this year. Some banks are already less willing to waive them, and the stimulus checks and other government measures that have padded people’s checking accounts are expected to peter out.

For banks, overdraft fees are a source of fierce criticism, but they are also typically a small revenue stream. Ally, for example, collected $5 million in overdraft charges in 2020, or 0.07% of its total revenue. The bank said it has never charged customers overdraft penalties on debit transactions.

Sen. Elizabeth Warren (D., Mass.) criticized the biggest U.S. banks at a Senate committee hearing last week for collecting the fees at all after the pandemic hit.

“This is about millions of families across this country who in the last year saw interruptions to their paychecks and challenges with extra expenses,” Ms. Warren said in an interview. “And these giant financial institutions had a chance to step up and help those families and not one of them did.”

The country’s four largest banks took in close to $4 billion in overdraft fees in 2020, down about 28% from 2019.

When the pandemic hit, regulators including the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. encouraged financial institutions to work with customers, including by waiving overdraft fees. The guidance didn’t require banks to stop charging the fees. Some analysts expect the Consumer Financial Protection Bureau to try to limit overdraft fees during the Biden administration.

Ally automatically waived fees between March and July 2020. Typically, customers who overdraft their accounts with the bank have six days to replenish them. After that, customers have to deposit money before making any purchases.

Black households and those with low-to-moderate incomes are almost twice as likely to incur overdraft fees as white households or those with higher incomes, according to a report from the Financial Health Network, a research firm partly funded by financial institutions. Customers can rack up fees, typically about $30, for each day their account remains overdrawn and for each withdrawal made during that period.

Many banks offer overdraft-protection services, including automatically transferring money from other accounts or waiting to charge a fee until the account is overdrawn by a set amount. But few have gotten rid of the fines altogether. In 2019,

Discover Financial Services

eliminated all account fees for its roughly one million customers.

Write to Orla McCaffrey at orla.mccaffrey@wsj.com