Overdraft fees are getting a much-needed update. New regulations from the Consumer Financial Protection Bureau (CFPB), along with evolving industry practices, are making these fees more manageable — and less stressful — for consumers.

The CFPB has introduced a $5 cap on overdraft fees for large banks with over $10 billion in assets, a move aimed at easing the financial burden on households.¹ At the same time, many banks are voluntarily making changes, such as lowering fees and offering new tools to help customers avoid overdrafts.

The new rule

There are three options that financial institutions can make as a result of the new rule, which will take effect on Oct. 1, 2025, according to the CFPB.²

Cap overdraft fee at $5: This is the simplest method, which the CFPB estimates is the level at which most banks could cover costs associated with administering a courtesy overdraft program.

Cap fee at an amount to cover costs and losses: Banks that want to offer overdrafts as a service can set their fee at the precise amount that covers their costs.

Disclose terms of the overdraft loan: Banks can continue to charge higher fees for overdrafts, but in doing so, they must treat it as any other loan and give consumers a choice in whether to open the overdraft line of credit, as well as provide disclosures, send periodic statements, and offer an option to pay automatically or manually.

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Impact of overdraft fees

Overdraft fees, which traditionally ran as high as $35 per transaction, have long been a source of anxiety for consumers—especially those managing tight budgets. The CFPB estimates that the new $5 cap could save U.S. households up to $5 billion annually, which is an average of $225 per household.^3,4

With Empower research revealing that 37% of Americans unable to afford an emergency expense over $400, overdraft fees can seriously impact a household’s monthly budget. Those households that are financially vulnerable pay overdraft fees more frequently than financially healthy households, bearing more of the cost burden.⁵

Banking industry adapts

These fees have historically been an important source of revenue for banks, particularly for larger financial institutions. Adjusting to the reduced cap will require banks to rethink their strategies for offering overdraft protection.

The Consumers Bankers Association points out that some banks have already been offering innovations designed to prevent overdrafts altogether. Features like fee-free small overdrafts, advanced account alerts, and improved mobile banking tools give customers more control over their accounts.⁶

By rolling out low-cost or no-cost account options and leveraging technology to enhance financial management tools, financial institutions are finding ways to meet customer needs while staying aligned with regulatory changes.

A more balanced approach

While the new fee limit is positive for consumers, it’s important to remember that overdraft protection still serves an essential role. For many, it acts as a financial safety net during emergencies or unexpected shortfalls. The challenge for banks is to maintain access to this critical service while ensuring fees remain fair and transparent.

This balancing act reflects a broader trend in the financial world: a growing emphasis on collaboration between regulators and banks to create systems that work for everyone. By prioritizing fairness and accessibility, the industry is moving toward a more consumer-friendly approach.

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What’s next?

The overhaul of overdraft fees will mean fewer financial surprises and more tools to manage money effectively for consumers. For financial institutions, it’s an opportunity to innovate and strengthen trust with customers.

As the industry continues to adapt, these changes signal a positive shift toward a fairer, more transparent banking experience.