The Overdraft Fee Reality: Why We Need Standards to Support Consumer Financial Health

Overdraft fees remain a costly burden. By incorporating new data sources, the Financial Health Network found that consumers paid $11.8 billion on overdraft and NSF fees in 2023—nearly $4 billion higher than previously estimated. It is clear that many consumers still face high, unpredictable costs when their account balances run low, which can hinder financial health. 

The burden of overdraft fees is not shared equally. Overdraft fees disproportionately burden financially struggling consumers—particularly low-income communities and communities of color—who often lack access to affordable credit alternatives. Data from the Finhealth Spend survey shows that nearly half (46%) of Financially Vulnerable households with checking accounts reported paying overdraft fees in 2022, compared to only 4% of Financially Healthy households. Furthermore, Black and Latinx households are also more likely to incur overdraft fees, and Black households are more likely to do so on small-dollar transactions, than white households. 

While some banks and credit unions have voluntarily restructured their overdraft programs in recent years—such as by eliminating NSF fees altogether, creating or extending grace period limits, limiting the total daily overdraft/NSF fees, or reducing their overdraft/NSF fees—there is currently no industry-wide standard guiding these efforts. This fragmented approach has resulted in inconsistent and unpredictable customer experiences, a lack of transparency, and incomplete consumer protections that leave millions of Americans vulnerable to financial instability. 

The issue of overdraft fees is just one example of a broader, systemic problem within the financial services industry. Financial institutions lack clear guidance and incentives to prioritize the financial health of their customers. Without a standardized approach to addressing their customers’ financial well-being, financial institutions struggle to design solutions that truly meet consumer needs. The absence of well-defined standards means they continue to operate in a reactive, piecemeal manner that fails to address underlying financial challenges for consumers.

Across industries, articulating standards has provided a mechanism for transparency and accountability that can benefit the sector overall. Standards have been established in a variety of settings, including LEED certification—which has created clear environmental impact benchmarks for green buildings—and GAAP accounting standards, which ensure financial reporting consistency and transparency. In the financial sphere, using data from prospective borrowers’ credit reports to develop credit scores is a standardized approach to assessing their risk of default. 

Financial health needs a similar approach: clear expectations and best practices that serve as a clear benchmark for institutions. Financial services providers can leverage these benchmarks to measure and report on their progress toward supporting customers’ financial health, and use them as a blueprint for practices they can adopt to improve outcomes. 

Financial health standards become all the more important in the current deregulatory environment, which has removed important mechanisms that previously encouraged financial institutions to reduce reliance on fees and prioritize consumer health. Advancing consumer financial health requires equipping financial institutions with the insights and frameworks they need to help customers build resilience and pursue opportunities. By developing and adopting financial health standards, banks and credit unions can:

• • Enhance transparency around fees and consumer costs, helping consumers make informed choices.
  • Drive product innovation by identifying where current offerings may be creating unintended financial stress.
  • Demonstrate leadership in an evolving marketplace where prioritizing consumer financial health is increasingly a competitive differentiator.

Financial health is not just the responsibility of individual consumers—financial institutions play a critical role in shaping the systems that influence financial stability and mobility. By adopting proactive, market-driven standards, the industry can advance financial health more effectively than reactive and piecemeal interventions. To ensure sustainable progress, financial institutions, policymakers, and consumer advocates must come together to define, adopt, and implement financial health standards that protect consumers and strengthen the industry alike.