Reexamining Overdraft Programs: A Guide for Financial Institutions

The pandemic continues to exacerbate financial health challenges for low-income workers. Meanwhile, awareness is growing about the disproportionate effect of financial services charges on Black and Latinx customers. Because these charges, such as overdraft fees, are disproportionately borne by Black and Latinx consumers, high institutional reliance on these charges risks undermining the commitments many institutions have made to racial equity in recent months.

Among those who overdraw their accounts, more than 40% do so infrequently, with one to three incidents annually. On the other hand, more than 25% overdraw frequently, with at least 10 overdrafts or non-sufficient funds fees annually. Among frequent overdrafters, 50% are very frequent users, with 20 or more overdrafts annually.

For these customers, overdraft can be a substantial cost and a significant drag on their financial health, and it could cause them to leave the banking sector altogether.

Many depository institutions are changing their overdraft policies to benefit their customers and their businesses. To help each institution evaluate possible reforms to overdraft policies and practices, we explore various solutions in this report, including offering alternative forms of credit and providing safe checking accounts. The Financial Health Network recognizes that there is no one-size-fits-all solution to reforming overdraft, so we developed a set of options for depository institutions to consider.

1. Evaluate existing overdraft policies and practices and make reforms, such as adding a cushion before charging a fee.
2. Help customers manage their monthly expenses through savings automation and budgeting and cash flow analysis tools.
3. Position customers to avoid overdrafts by ensuring they understand policies and by providing “safe to spend” calculations.
4. Offer alternative forms of credit, such as small-dollar credit programs that provide immediate cash flow without overdraft fees.
5. Provide safe checking accounts that comply with the national Bank On standards, including no overdraft fees and low monthly maintenance fees.