Re-Thinking Overdraft to Maintain Profitability while Ditching Fees
Product
October 21, 2022
Traditional deposit account overdraft programs can offer a much-needed source of short-term liquidity for customers. But too often, that service comes at a steep cost, with fees–often topping $35 per overdraft instance–that can quickly stack up, leading to a cycle of debt that’s difficult to escape from. What’s more, the vast majority of overdraft costs are paid by a small segment of banks’ customers: those who need overdraft the most–and who, by extension, can least afford the fees.
But over the past year, amid regulatory pressure on overdraft practices and competition from a new crop of challenger banks, many major financial institutions have begun to re-imagine their approach to overdraft, reducing or eliminating fees in a shift that could save consumers up to $2 billion annually, according to some estimates.
However, doing away with fees doesn’t mean banks can’t still profit from offering overdraft services, as challenger banks have demonstrated. Many of those newer market entrants have found success in linking fee-free overdraft protection to monetizable programs such as direct deposit–for instance, by offering free overdraft protection for customers who directly deposit a certain amount per month. In this way, banks can offer flexibility without putting undue burden on the customer—while still making a profit.
“Customers will reward providers who give them access to the liquidity they (sometimes desperately) need―especially if it comes without additional fees,” said Trish Cox, head of operations for Galileo Financial Technologies. “The key is meeting customers where they are and providing next-generation banking options that work with them and for them while reinforcing behaviors (like direct deposits) that drive profitability for the institution.”
Click here to read more from Trish Cox on the next generation of overdraft programs.
Enjoy our Insights?
Recent Posts

Corporate Hierarchy: Track Expenses with Spend Taxonomy
Don't let economic uncertainty derail your corporation in 2023. Optimize business spending and reduce costs by tracking expenses at various levels with spend taxonomy.

How Any Brand Can Capture the BaaS Opportunity in 2023
Banking as a Service allows brands to create new revenue streams, improve CX, embed financial services, and enhance the customer value proposition.

Till Partners with Parents and Banks to Teach Kids About Money
With an app and debit card, Till Financial enables parents to impart to their kids valuable lessons about saving, spending and managing their financial lives.

Partner Spotlight: Pathward + Galileo Promoting Financial Inclusion
Galileo and Pathward have worked for 17+ yrs to provide equitable financial solutions. The collaboration has led to innovative products and solutions.

Where Does Buy Now, Pay Later Fit in the Future of Banking?
Financial institutions are better suited to offer BNPL than current providers. Here’s how banks can capture a share of the market to drive profitable growth.

How Banks Should Prepare for Ramp Up in Real-Time Payments
Discover how banks can get ready for real-time payments by eliminating complexity, strengthening operations, and optimizing their processes for faster transactions.