Overdraft protection fees

Background

An overdraft occurs when a bank allows a debit transaction to proceed despite there being insufficient funds in a consumer’s account to cover the transaction. Consumers must be approved before banks extend short-term credit through overdraft protection. Overdrawn amounts must be repaid with applicable interest and overdraft fees. Overdraft differs from NSF, which occurs when a balance shortfall causes a transaction to be declined.

Banks generally offer overdraft protection in 3 different ways:

Monthly overdraft protection: Fixed, recurring monthly fee charged to customers who are approved for overdraft protection that provides coverage for multiple overdraft occurrences during the billing period. Interest is payable on the overdrawn amount.^{Footnote 1}

Pay-per-use overdraft protection fee: Fixed fee charged to customers who are approved for overdraft protection each time a debit transaction is processed despite there being insufficient funds in the account. Interest is payable on the overdrawn amount.

Linked-account overdraft protection fee: Fixed fee charged when a customer arranges in advance for funds to be transferred from a linked product (such as a savings account or line of credit) to cover transactions when their principal account has insufficient funds. A fee is typically charged for each transfer. Interest is payable where the linked product involves the extension of credit.

Fee structure

Overdraft protection fees are treated as a form of interest under federal law. Section 347 of the Criminal Code sets the criminal interest rate in Canada as any annual percentage rate exceeding 35%. The Criminal Code defines “interest” broadly, capturing not only traditional interest charges, but also certain fees and charges associated with the extension of credit, including overdraft charges. It effectively sets the maximum amount of overdraft that can be charged by banks to $5.

Consumers may incur one or more of the following charges when they go into overdraft:

• overdraft protection fees (monthly or pay-per-use)
• interest on the overdrawn balance

Most banks charge $5 per month for overdraft protection plans and $5 per transaction for pay-per-use overdraft protection. Where coverage is offered through a linked account, banks typically charge a $5 fee per transfer.

Overdraft protection practices vary across the industry.^{Footnote 2}  For example, some banks waive the monthly overdraft protection fee in months when the overdraft is not used, while others charge it regardless of usage.

Under the pay-per-use model, some banks charge an overdraft protection fee each time an account is overdrawn, while others charge it only once per day, even if multiple overdraft transactions occur. Many banks also waive overdraft protection fees for certain account types, such as student or senior accounts, or as part of premium account packages.

Canada’s banks apply an annual interest rate in the range of about 19% to 22% on overdrawn amounts, calculated daily and charged monthly. Most banks also require that the overdraft balance be repaid within a specified period (e.g., 89 days).

Some alternative financial service providers such as fintechs allow accounts to go into negative balance for a short period of time (e.g., 5 days) or if the account is linked to a form of credit. For example, KOHO Financial offers linked account overdraft through a no‑interest line of credit with a typical limit of $225.

Disclosure

Banks are required to disclose all applicable fees in account agreements. Information related to overdraft fees is disclosed as part of the broader account agreement and fee schedule. Banks are required to disclose overdraft protection fees, including their structure, when they apply, along with any associated interest charges. These disclosure requirements are intended to ensure that consumers are informed of potential charges and do not incur fees that were not disclosed.

For personal deposit accounts, banks must send the customer an electronic alert when the customer’s account balance falls below $100, or below a threshold set by the customer. The alert must also indicate what the person may do to avoid fees and the time within which action must be taken.

Key findings and implications

Key finding 10: Usage-based, personalized disclosure would improve transparency of overdraft protection fees

For deposit accounts, banks are required to notify customers of changes to certain fees and to provide periodic statements. Some banks also provide their customers with access to tools and information to help them monitor their accounts, track transactions and fees, and manage their finances.

Consumers may have low visibility on usage patterns, limiting their ability to understand when fees will be applied, compare products based on cost, and take steps to reduce total charges.

Transparency related to overdraft fees raises challenges with respect to consumers’ ability to assess the cumulative cost of these fees over time. In practice, consumers may incur fixed overdraft protection fees in months with no overdraft usage, or multiple pay-per-use fees when several transactions are processed while an account remains overdrawn. Consumers may find it difficult to track their transactions, making it harder to assess which account features align best with their needs.

Transparency could be further enhanced with a statement from banks that would support assessment of product fit, including through like for like comparisons and, where available, information on alternative account options offered by the same bank. Improvements to disclosure requirements could help address these challenges and support more informed consumer decision-making. Opportunities to improve transparency are described in the “Transparency” chapter of this report.

Key finding 11: Overdraft protection can be a lower-cost alternative for consumers who experience dishonoured payments

For consumers who occasionally incur NSF fees, overdraft protection may be a lower-cost option, particularly when NSF fees are combined with charges related to declined transactions or dishonoured payments.

For example, a monthly overdraft protection fee may be less expensive than a declined transaction that triggers a $10 NSF fee and dishonoured-payment fees imposed by merchants (often $20–$40 per NSF transaction), even after accounting for interest on a small, short‑term overdraft balance.