Bank accounts are critical to participation in the financial mainstream and to financial well-being. But for individuals and families struggling to make ends meet, bank accounts come with pitfalls or are simply inaccessible. Overdraft and nonsufficient funds (NSF) fees can drain money that people need for rent, food, and medical expenses.
Banks and credit unions earn a substantial amount of revenue from overdraft and NSF fees – over $12 billion in 2025. About a quarter of people live in households that incur overdraft fees each year. Some financial institutions actually manipulate people into these fees. These high fees and predatory overdraft programs devastate individuals and families already in economically precarious situations. Excessive overdraft fees can lead to bank account closures and prevent people from opening new ones.
Abusive overdraft and NSF fee practices fall most heavily on economically disadvantaged households, which have lower incomes and lower credit scores and are more likely to incur multiple fees. Black and Latino households are more likely to incur overdraft fees than white households are. Banks make most of their overdraft and NSF fee income from a small portion of accounts. Thus, bank profits derive primarily from the households that can least afford the fees and exacerbate longstanding racial injustices.
Overdraft and NSF fees had been coming down in recent years in the face of public attention and regulatory pressure. In 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule that would have limited most overdraft fees to $5, saving $5 billion a year, an average of $225 for households that pay overdraft fees. But Congress overturned that rule in 2025, and both the CFPB and federal banking agencies began backtracking from efforts to limit overdraft and NSF fees. Not surprisingly, overdraft fee revenue is now rising at some banks.
States can rein in financial institutions’ extractive policies and help their constituents maintain financial well-being by limiting overdraft and NSF fees. States have authority over the practices of their own state-chartered banks and credit unions, over state-chartered credit unions regardless of the chartering state, over out-of-state banks that do not have branches in the consumer’s state, and over nonbank financial technology (“fintech”) companies that offer banking services. With respect to federally chartered banks and credit unions, and out-of-state banks operating out of a branch in the consumer’s state, the full contours of preemption are not clear, but states can address practices as long as they do not prevent or significantly interfere with the financial institution’s powers.
In addition to traditional bank accounts, states should pay attention to the growing market of banking apps offered by nonbank companies. These apps typically do not charge traditional overdraft or NSF fees, but they may have other features or costs that work similarly.
The strongest reforms would be to:
- Limit overdraft fees to $5
- Limit the annual number (six) or cost (no more than $200/year) of overdraft fees, with no more than one fee per episode
- Prohibit NSF fees
Other lesser measures can also limit the destructive impact of overdraft and NSF fees:
- Prohibit overdraft fees on debit card and ATM transactions
- Prohibit multiple fees for a single negative balance episode, even one involving multiple payments or days
- Require a cushion for small overdrafts and a grace period before charging a fee
- Ban “surprise” overdraft fees incurred when the balance was positive at the time of the transaction but later settled negative.
- Prohibit reordering of transactions that increases fees
- Prohibit multiple fees for a single overdrawn check or payment
- Require institutions to offer safe bank accounts without overdraft and NSF fees
To ensure that reforms are effective and to prevent evasions, state should:
- Include so-called “tips” on nonbank banking apps and transfer fees from savings accounts or other accounts and in any limit on overdraft fees
- Cover nonbank fintechs and out-of-state banks without branches in the state that often partner with fintechs and predatory lenders
- Include an anti-evasion provision
- Ensure that rules are privately enforceable
Reform could be adopted through legislation, or some of these measures could be adopted through state regulation or guidances. To build the case for reform, to encourage voluntary improvements, and to enhance regulatory authority, states should:
- Give the state regulator authority and a mandate to adopt reforms and address new practices or evasions
- Collect and publicize data on overdraft and NFS fee revenue and practices
States can build on the progress to date, prevent backsliding, and enhance a core component of family financial stability by making overdraft and NSF fee reform a priority.
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