Everybody loses without access to overdraft services


Mark Roe |

No overdraft fees may sound consumer-friendly — until you realize that people will still overdraw their accounts and need a way to meet short-term liquidity deficits.

What does “no overdraft fees” really mean?

For some consumers, it means their transactions will not be paid and it could set them back even further because of late fees and other penalties. It also makes it harder for community financial institutions to fulfill their mission to serve their account holders and help them achieve financial health.

There are many drawbacks to taking away overdrafts — it’s a service that nearly 9 in 10 consumers find valuable. Plus, it presents a step back for consumers and barriers for financial institutions as they try to provide low-cost banking options for all.

Your account holders lose out if you don’t provide overdraft protection

Without the safety net of overdraft privilege available from their community bank or credit union, consumers must find alternate ways to pay for bills or emergency expenses. This can turn into a crisis quickly, given that we’re experiencing one of the most difficult financial times in the nation’s history.

Factors stretching consumers’ budgets include:

  • Interest rates With an average 30-year mortgage rate of 7.59% (Sept 2023) following a recently strong seller’s market, homeownership has become less affordable and taken up more of consumers’ paychecks.
  • Credit card balances Consumer debt, and annual percentage rates for credit cards, are both nearing all-time highs, as many consumers struggle to keep up with the high cost of living.

Meanwhile, consumers still face consequences for unpaid bills, including high late fees and lowered credit scores. In fact, just one late mortgage payment can drop a credit score by 90 points or more, and the late payment stays on their credit history for years.

Taking away access to overdraft services makes it even more difficult for consumers to make payments on time and keep their financial lives on track. Perhaps that’s why 72% of consumers who have paid an overdraft fee in the past year were glad their bank covered their payment, rather than returned or declined.

Your financial institution loses out if you don’t provide an overdraft program

Without providing multiple overdraft options, banks and credit unions miss the opportunity to meet the service needs of their account holders in a number of ways.

  • Relationship damage: The average American has more than $92,727 in debt, including credit cards, mortgages, auto loans and student loans. This balancing act can put many from all walks of life in a precarious situation if an unexpected expense or emergency, like a sudden loss of employment or other financial emergencies. If your bank or credit union doesn’t offer a safety net of an overdraft privilege service, your consumers may go somewhere that does (or resort to risky methods of accessing cash).
  • Missed educational opportunities: Will a pawn shop or a payday lender take the time to counsel how to better manage your account holders’ finances and avoid overuse? Not a chance. On the other hand, your community bank or credit union is in a position to offer assistance to get your account holders back on the right path, if needed. Both parties win when your account holders build financial health and wealth.
  • Revenue replacement alternatives: With lost revenue from overdraft services, how will financial institutions make up the difference? They will either have to decrease staffing or increase fees on other products and services — either of which can negatively affect all parties.

54% of consumers oppose preventing banks from offering overdraft protection

Taking overdrafts away from account holders is not the “consumer-friendly solution” it’s been made out to be lately in the media. Cash shortages and emergency bills will not go away, it is a service that many people see as valuable, convenient, and in some instances, necessary.

The solution is to offer a fully disclosed, well-communicated overdraft service with fair and reasonable fees

Many community banks and credit unions already offer such a solution, accompanied by financial education and counseling, which their account holders appreciate. More than 60% of consumers think it’s reasonable to be charged an overdraft fee, and 74% view these fees as reasonable when large payments like mortgages or rent payments are covered and paid on time. It is not a matter of eliminating the service; it’s about making sure it continues to evolve and adequately meet the needs of today’s consumers.

Creating a modern overdraft program

To remain both fair and competitive, financial institutions can take a number of steps to ensure their overdraft program meets modern consumer needs and industry best practices. This includes conducting a full examination and analysis of their:

  • Fee assessment practices
  • Fee amounts, as compared to local and regional averages
  • Grace periods
  • De minimis threshold
  • Caps on number of fees charged per day or statement period

A transparent overdraft service that empowers consumers should be just one of several options in a broad menu of services available to account holders. For many account holders, it’s a lifeline they can count on and use responsibly if the need arises, without embarrassment or other unpleasantries.

Contact the experts at JMFA today for a free analysis and specialized recommendations. 

Download our whitepaper Does your overdraft program check all the boxes of a consumer-friendly service?

Mark Roe has more than 30 years of industry experience leading all JMFA sales efforts and strategic initiatives leading to long-term stability for community banks and credit unions. He joined JMFA as a consultant, providing operational guidance for improved performance on various projects supporting community banks and credit unions. He later transitioned to the sales team as Regional Director of Sales for the Northeast market before being named EVP of National Sales.


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