The news: The Office of the Comptroller of the Currency’s (OCC) formal review of overdrafts at banks culminated with a list of suggested practices the institutions should adopt. Acting Comptroller Michael Hsu said the proposed changes “promote consumer financial well-being, as well as greater income and wealth equity”:

• Providing a grace period before charging an overdraft fee
• Allowing negative balances without triggering fees
• Offering balance-related alerts
• Providing real-time balance information
• Linking checking checking accounts to other accounts as a means of offering overdraft protection
• Collecting fees from a customer’s next deposit only after other items have been posted or cleared
• Not charging multiple overdraft fees for separate purchases in a single day

Many banks have previously made changes that align with some of the OCC’s suggested reforms—earning due recognition from Hsu—but there is still a long way to go.

The problem: Overdraft fees have become a money machine for banks, largely at the expense of consumers.

• Past research conducted by the Consumer Financial Protection Bureau (CFPB) showed that just 9% of consumer accounts shouldered almost 80% of total overdraft revenue for banks.
• The average amount a customer must pay for overdrawing an account reached an all-time high of $33.58 in 2021. Metropolitan areas felt the burden particularly hard, with Philadelphia, Baltimore, and Houston all averaging fees over $35.

The road ahead: Incumbents and neobanks alike will soon find themselves at a crossroads as recent comments from financial regulators point toward a pro-consumer future.

• Legacy banks will need to reckon with giving up a significant source of revenue. If the CFPB set the nail with its pronouncement of planned “regulatory interventions” against the fees, the OCC’s list of suggested practices hammered it home: Overdraft practices at banks may be long standing, but their days are numbered. Replacing lost revenue from these foregone fees will be no small undertaking. Rebecca Borné, senior policy counsel at the Center for Responsible Lending, told CBS that, “The fees have become somewhat of a cash cow [for banks] over the past 20 years.”
• Neobanks will lose a potent weapon in the battle for new users. Popular US challengers like Chime and Current seek to pick off disillusioned incumbent customers by using limited exposure to fees as a key selling point. For example, Current has likely passed up over $100 million in overdraft charges, but has seen its user base skyrocket in recent years. Getting rid of overdrafts would be a plus for consumers, but it would weaken one of the neobank industry’s most effective value propositions.