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Is Your Overdraft Fee Viewed as a Penalty or Providing a Service?

By Cheryl Lawson, EVP of Compliance Review, ADVANTAGE

May 2023

It’s all in the eyes of the beholder. Learn more about creating a better experience for your members regarding your overdraft program.

QUESTION: When a member overdraws their account, is the overdraft fee considered a charge for using a service or a penalty for having non-sufficient funds?

ANSWER: A consumer-first overdraft program should be viewed as a service by both your credit union and your members.

Which would you rather pay: a $25 charge for a convenient and secure service that positively impacts your life or a $25 fee that penalizes you for a mistake or situation beyond your control?

Most of us would prefer the former, even though in the case of an overdraft charge, the outcome is the same, a service is provided, and your payment is made, on time, even if your account balance is negative.

The Difference Between a Service and a Penalty
A service provides a benefit offered by one party to another that brings about a desired change for the recipient of the service. Its perceived value (in time savings, compared to paying late or returned check fees, convenience, psychological effect, etc.) and real value (compared to late fees or returned check charges) should be more than the cost of the service in order for it to appeal to members. With an overdraft, it’s an action for the member.

A penalty, meanwhile, is a punishment or unpleasant experience suffered as the result of an action or circumstance. It’s assessed by one party after an event or threshold is triggered by another party. In an overdraft setting, it’s an action against the member.

Why It Matters
The difference between providing a service and assessing a penalty is more than just semantics. It’s part of what separates pro-consumer overdraft programs from the rest that regulators, legislators and media have been so focused on lately.

An overdraft penalty is automatic and gives members no other option. It’s a negative experience that can feel unfair or even deceptive if the member hasn’t been made fully aware of the rules of their account. It’s punitive and unhelpful at its core, making it anti-consumer. That’s what raises red flags to regulators and examiners.

An overdraft service gives account holders the option to utilize a benefit if they determine it’s the best or most valuable option available to them to resolve a financial shortfall. It’s reasonable, responsible and reliable at its core, making it pro-consumer. And that’s what regulators and examiners are looking for — not to mention your members.

Is your overdraft program currently assessing a penalty or providing a service? If the former, it’s time to make the shift to a service-based model to minimize risk, optimize results, better serve your members and build long-term loyalty. With the right program, approach and communications, your credit union’s overdraft fees can be viewed as a valued service versus a costly penalty.

For answers to all your questions about maintaining a fully disclosed overdraft service, connect with the experts at ADVANTAGE.


ADVANTAGE, powered by JMFA, is dedicated to empowering financial institutions with strategic solutions for growth and success. Our comprehensive services include overdraft program consulting and compliance, checking account acquisition strategies, contract negotiation expertise, and consulting for technology strategy, evaluation and selection. With a rich history of serving credit unions nationwide, we are committed to delivering exceptional value and fostering long-lasting partnerships. Choose ADVANTAGE, to elevate your performance, identify new opportunities, and build more value.