One of the most maligned of all financial products is the overdraft. Some banks love this product and generate a large portion of their profits from it. Consumers, in general, hate it but some need it to survive.
It is a classic win-lose product. The bank wins and the customer loses. In 2025, there should be a better way.
Before we get to that, we should touch on how big this problem is. A recent study from the Financial Health Network showed that overdraft and NSF (non-sufficient funds) revenue at banks and credit unions was $12.1 billion in 2024, slightly up from the previous year.
These numbers are down from pre-pandemic numbers as more banks have reduced or eliminated these “junk fees” under pressure from consumers and the CFPB. Of course, that government pressure no longer exists for now, but I don’t see these banks doing an about-face after touting these changes.
I have to admit I am a little obsessed with overdrafts (see previous articles here, here, and here) as I have noted the profound impact that fintech has had on this product. The last five years have seen bank after bank change their overdraft policies to make it more friendly for consumers, which I would argue is in direct response to the new approach fintechs have taken.
I applaud the new products that fintechs like Dave, Chime, Varo, MoneyLion and many others have created, particularly around fee-free overdrafts (Chime’s Spot Me product is probably the most popular here). But I still think we haven’t yet created the ideal overdraft product.
So, now I would like to provide some ideas for how I think we can reimagine overdrafts for the future. Rather than a blunt instrument that works exactly the same way for everyone in every situation, there is no reason overdrafts can’t be personalized and flexible. These ideas are all doable using technology and open banking tools that are available today.
- Personalized overdraft limits
We have had risk-based pricing in fintech lending since the early days of LendingClub and Prosper. Today, with cash flow underwriting, it is possible to assess credit risk based purely on the transaction history in the bank account. This is very convenient for assessing overdraft risk! Why doesn’t every customer have a personalized overdraft limit (the amount the account can go negative) based on their cash flow? This number could be displayed prominently in the banking app and could also be dynamic, changing every month based on new data.
- Forecasting overdrafts before they occur
Why don’t we hear from banks like this: “We notice your electric bill typically posts on the 15th, but your next direct deposit isn’t until the 17th. You’re projected to be $75 short. Would you like to adjust payment timing or activate a short-term buffer?” With today’s AI engines, this does not seem like a heavy lift, but few banks or even fintechs are doing this. This is overdue.
- Dynamic and tiered pricing
Rather than flat overdraft fees, banks could implement sophisticated pricing models that reflect actual risk and customer relationships:
- Relationship-Based Pricing: Customers with longer histories, multiple products, or strong deposit patterns could receive preferential overdraft terms.
- Real-Time Risk Assessment: Instead of charging the same fee for every overdraft, banks could assess the specific risk of each transaction and price accordingly.
- Graduated Fee Structures: Small, short-duration overdrafts could incur minimal or no fees, with costs scaling based on amount and duration.
This approach would align the cost of overdrafts with the actual service value and risk, creating a more equitable system.
- Connect to a small-dollar loan product
Small-dollar lending is having a moment in banking with six out of the top eight banks now offering some kind of small-dollar credit product (hat tip to Alex Johnson). Underwriting for these products is typically 100% automated, so why not offer this immediately if someone is about to overdraw their bank account? The revenue could likely be higher for the bank and the customer will be happy. This takes us to a win-win on overdrafts!
- Integration with an EWA company
I love earned wage access (EWA) as a product and it could have a real role to play here. Now, companies like DailyPay partner with banks but more as a distribution channel than a deep integration. I know DailyPay powers PNC Bank’s EarnedIt app for EWA but this is just so an employee of a commercial customer of PNC can use EWA. PNC provides “overdraft solutions” but why don’t they include their EarnedIt app customers in a more comprehensive service? They could notify these customers when they are about to overdraft and ask if they want to take an advance on their earned wages to cover the charge. This could even earn a little revenue because these instant transfers usually carry a (less than $5) fee.
Those are just some ideas that could be part of a new kind of overdraft protection. Bundling some of these ideas into a cohesive product would be something I expect many consumers would be happy to pay for. While consumers hate generic monthly “checking account fees,” we know they are willing to pay for premium services. Look at the popularity of the paid offerings from Robinhood and Revolut, these are now both nine-figure businesses in their own right.
I don’t want to come across as implying existing efforts are useless here. In fact, I think some of the offerings from banks such as Truist, Huntington and Ally are truly benefiting consumers but I have not seen anyone approach a fully featured overdraft product like I describe here.
On the fintech side, there have been some creative moves by the likes of Chime and MoneyLion where friends can help provide a small boost to the amount you can overdraft. These are good moves but we can do so much more.
I also don’t want to downplay the complexities of some of the features – they will provide technological, compliance, logistical and marketing challenges. And they will be expensive to implement. But getting this right could be game changer for customer retention and satisfaction.
The Move to Win-Win
I firmly believe the financial institutions that will lead in this space will recognize that overdrafts aren’t going away – they just need to be reimagined into a product that is a win-win. The most successful approach will combine the best technology with genuine customer empathy to create overdraft solutions that help consumers while providing reasonable compensation to the institutions bearing the risk.
The next generation of banking customers is going to demand more from their financial institutions, with better financial health being top of mind. Helping improve financial health should be the foundation for every bank and fintech company, all products should revolve around that common mission.
By reimagining overdrafts as part of a comprehensive approach to financial management rather than isolated penalty events, banks can preserve an important service for consumers who need it while addressing the legitimate concerns raised by regulators and consumer advocates.
In this intelligent banking future, overdrafts become not just a safety net but potentially a springboard to better financial health, creating value for both sides of the banking relationship.
