Overdraft Trends Amid Historic Policy Shifts

Amid bank policy overhauls and renewed regulatory attention to overdraft and NSF fees, understanding when, how, and why consumers overdraft should inform further shifts in industry practices and regulatory actions – especially in an era of rising prices and economic uncertainty.^2,3  This brief explores consumers’ experiences with, and attitudes toward, overdraft/NSF fees, leveraging new data from a large-scale, nationally representative survey conducted for Financial Health Network’s forthcoming FinHealth Spend Report. 

In 2022, banks and credit unions collected an estimated $9.9 billion in total overdraft/NSF fee revenue – a 6% decline from the $10.6 billion collected in 2021.^{4, 5} The decline was even more pronounced relative to estimates of pre-pandemic revenue. The 2022 total represents a dramatic $5.6B (36%) decline compared with 2019 estimates of $15.5 billion.⁶

These shifts reflect both economic and institutional influences: for one, stimulus and other government relief during the pandemic helped bolster bank accounts, likely reducing the incidence of overdraft. In tandem, over the past two years, numerous financial institutions have adjusted their overdraft protection policies.⁷ Notably, most of the largest banks eliminated NSF fees. Many institutions also modified one or more overdraft/NSF-fee-related policy, such as reducing the size of the fee charged, lowering the cap on the maximum number of fees per day, instituting a grace period, or increasing the minimum negative balance amount to incur a fee. In a few instances, some institutions eliminated overdraft/NSF fees altogether.⁸ 

The following brief offers new insight into how often households overdraft, who overdrafts most frequently, and consumer sentiments that can inform how institutions implement equitable policies that promote financial health.

The prevalence and frequency of overdraft stayed largely unchanged in 2022.

Despite significant shifts in overdraft bank policies, both the proportion of households that paid an overdraft fee at least once and the frequency with which they did so remained largely unchanged in 2022 compared with the previous two years.⁹ 17% of households with checking accounts reported that they or someone in their household paid an overdraft/NSF fee in 2022, unchanged from 2021 and not statistically different from 16% in 2020.¹⁰

Consistent with previous Financial Health Network research, our survey again finds deep disparities across race, income, and age as it relates to the prevalence of overdraft fees.¹¹ The data show that in 2022, 

• • Black and Latinx households reported having overdrafted more often than White households (amongst households with checking accounts, 26% of Black and 23% of Latinx households reported having incurred an overdraft fee, versus 14% of White households).
  • Younger respondents were three times as likely to have overdrafted than older respondents (amongst those with accounts, 24% of respondents aged 18-25 had overdrafted, compared with 8% of those 65 and older).
  • Households with incomes under $30,000 were twice as likely to report at least one overdraft than those with incomes of $100,000 or more (22% vs. 11%, among households with accounts).

For most of the 17% of households that reported having paid an overdraft fee in 2022, overdrafting was a relatively infrequent occurrence, with a quarter of those households reporting only a single occurrence. Yet 9% of households that overdrafted did so frequently – more than 10 times – in 2022, suggesting these households faced chronic challenges in meeting expenses. Overall, an estimated 1.76 million households in the United States overdrafted frequently.¹² This, again, is not materially different from 2021.

The persistence of these overdraft patterns in 2022 may be due, in part, to the relatively recent implementation of banks’ adjustments in their overdraft policies. It could also suggest that economic pressures are counteracting some of the benefits of these institutional changes, as consumers now face economic headwinds without the buffer of the expanded unemployment benefits and stimulus payments they received in 2020 and 2021.

Figure 1: 9% of overdrafting households (n=725) report more than 10 overdrafts a year.
Number of overdrafts, among households with one or more overdrafts.

Financially Vulnerable households overdraft most frequently.

Financial health, as measured by the Financial Health Network’s FinHealth Score®, provides another lens through which to understand who bears the greatest burden of overdraft. Approximately 15% of U.S. households are considered Financially Vulnerable – a disproportionate number of whom are Black or Latinx. Financially Vulnerable households face severe financial strain, with the majority earning $30,000 or less in household income, and only 9% reporting that they are able to pay all their bills on time. Most Financially Vulnerable households hold an unmanageable amount of debt and little to no emergency savings.¹³ For the Financially Vulnerable, overdraft fees can have a considerable negative impact, intensifying existing financial challenges.

Financially Vulnerable households are more likely to overdraft – and to overdraft more frequently –  compared with their Financially Healthy peers. In 2022, nearly half (46%) of Financially Vulnerable households with checking accounts reported having overdrafted. Of that group, 35% reported six or more overdrafts, including 20% that reported more than 10. Of individuals who reported overdrafting more than 10 times in 2022, 82% were Financially Vulnerable. 

By comparison, very few Financially Healthy households with checking accounts (4%) reported any overdrafts in 2022. Of those, most (59%) reported only a single overdraft event, suggesting that the overdraft does not reflect a household’s overall financial well-being. In fact, less than 0.1% of Financially Healthy households reported more than 10 overdrafts. These findings suggest that the most financially insecure households incur the vast majority of overdraft fees. We estimate that Financially Vulnerable people paid over $6 billion in overdraft fees in 2022 – more than 60% of the total collected – while comprising only 15% of the U.S population.

While our data show disparities by race and ethnicity in the share of the population overdrafting, we do not see evidence that people of color are disproportionately frequent overdrafters. However, our sample sizes for this group are small, and further investigation is needed to better understand composition.¹⁴  

Frequent overdrafters are more likely to intentionally overdraw their accounts.

Among respondents from households that overdraft infrequently – once or twice – a majority (60%) reported that their most recent overdraft resulted accidently, i.e. from believing (at the time) that they had sufficient funds to cover the transaction. However, among households that frequently overdraft, most respondents reported that their last overdraft was intentional or a gamble, suggesting a different relationship with the service.

Only 16% of all overdrafting households said they knew that their balance would not cover the expense when they executed the most recent transaction that generated a fee.¹⁵ Yet 35% of respondents from households with more than 10 overdrafts said their last overdraft was intentional (see Table 1). Notably, another 28% of respondents – and 38% from frequently overdrafting households – said they took a gamble: that they knew their account balance was low, but thought there was a chance their funds would cover the expense.

Timing lags – the time between when a deposit is made and when funds become available, as well as the time between when a payment is initiated and when funds are actually debited – can force cash-strapped consumers to rely on guesswork. Many overdrafts occur soon before an account receives a paycheck or benefits payment.¹⁶ Given that existing bank payment systems sometimes require multiple days to process deposits and clear funds, consumers can miscalculate how much money they actually have available or will have available before making a transaction. Furthermore, in a world in which consumers preauthorize automatic debits from their accounts to cover various bills, it can prove challenging for consumers to keep track of when billers will pull funds from their accounts. 

For consumers living paycheck to paycheck with few options to cover immediate liquidity needs, overdrafting an account serves as a convenient, but extremely costly, option. According to our survey, 50% of households with more than 10 overdrafts had savings that would cover less than a week’s worth of expenses. Another 30% of households who overdrafted frequently only had sufficient savings to cover one to three week’s worth of expenses. These observations suggest that households who overdraft frequently have limited cash on hand, resulting in high overdraft usage to meet short-term liquidity constraints.¹⁷

Transactions of $50 or less frequently trigger overdraft fees.

When asked about the size of the most recent transaction that resulted in an overdraft fee, 45%  of respondents reported that the transaction was for $50 or less. Of transactions greater than $50, roughly half were $150 or less.¹⁸ 

We see evidence, however, that among households that overdraft relatively frequently, the most recent overdraft was on a larger dollar amount: 64% of respondents from households that overdrafted more than five times reported that their last overdraft was on a purchase of more than $50, compared with 44% of those from households that overdrafted only once. This difference holds even after controlling for income. Our finding is consistent with the apparent differences in intentions: consumers who reported intentionally overdrafting (67%) are more likely to have done so on transactions greater than $50 compared to consumers who did not intentionally overdraft (46%).

Consumers would prefer to have had smaller recent transactions declined instead of incurring an overdraft fee.

To get a sense of how consumers view the tradeoffs between paying an overdraft fee and having a transaction declined, we asked respondents about their most recent overdraft event. The data suggest a relationship between the size of the transaction that triggered the overdraft and whether the consumer would have preferred a paid transaction with an overdraft fee versus a declined transaction. 

In general, larger transactions were associated with a preference for incurring an overdraft fee. 60% of individuals who reported that their last overdraft was for a transaction of $25 or less said they would have preferred that the purchase or payment be declined. But the opposite is true for transactions above $25, with the majority of households indicating that they would have preferred to incur the fee and enable the purchase to go through. Among those whose last overdraft was on a transaction greater than $50, nearly three-quarters indicated that they preferred to incur the fee rather than have their purchase or payment declined.

When looking specifically at respondents from households that overdrafted more than 10 times, the vast majority (81%) indicated that they would have preferred to incur a fee on their most recent overdraft transaction rather than have the purchase or payment declined. This finding suggests that those who overdraft frequently experience a recurring and urgent need for additional cash to cover expenses.