7 in 10 Americans Find Overdraft Fees Unfair

Bank overdraft fees are back in the news. Designed in the late 1960s to help customers avoid bounced checks, overdraft—when banks allow payments (for a fee) even though customers don’t have enough in their account—has transformed over time into a major moneymaker for financial institutions. Consumers, especially those in low- and moderate-income households, now pay billions of dollars annually in fees. Guidance issued by banking regulators has prompted some banks and credit unions to improve their overdraft practices and provide more affordable small-dollar loans, offered in amounts of up to $1,000 and repaid in installments. However, many financial institutions have not made these changes, creating an uneven playing field in the market.

Overdraft was historically a courtesy service banks provided when checks were the primary method of payment. But with the advent of debit cards and other modern forms of payment, overdraft fees surged. The typical debit transaction that results in an overdraft is $24 or less, yet the fee itself can be as high as $35.

Research by The Pew Charitable Trusts found that overdraft programs do not meet the needs of most consumers. High or unpredictable overdraft fees are a primary reason consumers leave the banking system or seek credit from payday lenders—who offer small loans at high interest rates with unaffordable payments, due upon the borrower’s next paycheck. Most overdrafters (68%) would prefer to have their ATM and debit overdrafts declined than incur a $35 fee. Despite this preference, less than 30% of overdrafters say their bank had discussed other options with them. Surprisingly, even among the minority of overdrafters who did talk about overdrafts with their bank, just 35% knew they could have the bank decline a transaction without a fee.

The American public also views overdraft fees negatively. Seven in 10 Americans think a $35 overdraft fee is unfair. And 84% of Americans want the government to encourage banks to cut overdraft fees.

Several large banks have eliminated overdraft fees entirely since 2021, and others have lowered their penalty fees to $10, $15, or $20. Nearly all large banks have added some valuable safeguards that reduce the overdraft fees paid by consumers, while continuing to offer overdraft programs.

Banks now offer affordable small loans to serve Americans better

In recent years, the market and rules governing small credit have improved. A growing number of the nation’s largest banks have demonstrated they can profitably offer transparent, affordable credit in the form of small-dollar loans and lines of credit. To meet the needs of the one-third of overdrafters who turn to overdraft as a regular source of credit, banks are increasingly offering affordable small-dollar installment loans or lines of credit with transparent terms and lower costs. Today several large banks offer such products, providing an affordable alternative to high-cost payday loans. These loans are typically available in amounts of $500 to $1,000 and can be accessed quickly, with repayment time frames of at least three months.

The move by some banks to reduce overdraft fees and offer safe, affordable small-dollar loans demonstrates that the market is heading in a positive direction for banks and consumers. But other banks still charge large overdraft penalty fees that often surprise their customers. This can create an uneven playing field and act as a disincentive for more banks to offer affordable small-dollar loans. If more major banks continue to shift away from harmful overdraft fees and toward safe, affordable small-dollar loans, consumers stand to save billions of dollars each year.

Rachel Siegel is a senior officer, Gabriel Kravitz is a manager, and Travis Plunkett is a senior director with The Pew Charitable Trusts’ housing, labor, and education portfolio.