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For years, Canadians were charged as much as $50 in fees for being even a few dollars short in their bank account to cover a preauthorized debit or cheque. The 2024 federal budget aimed to address this with a $10 cap on non-sufficient funds fees.
As of March 12, a federally regulated bank or credit union cannot charge you more than $10 in NSF fees. They also cannot charge more than one NSF fee within two business days on the same account, and they can’t charge any NSF fees when the amount of your overdraft is less than $10.
This change is long overdue. According to the Department of Finance, one out of every three Canadians is hit with an NSF fee annually, and implementing this policy is estimated to save consumers more than $600-million a year. Keep in mind these fees fall disproportionately on financially vulnerable households.
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NSF fees and overdraft charges are frustrating penalties because they can stem from bad timing, not just bad budgeting. Some people get paid biweekly, others twice monthly. Or we might grocery shop weekly, while various subscriptions and preauthorized debits all move on slightly different schedules.
Sometimes a deposit lands one day later than normal and a payment comes out one day earlier. For many households in Canada, the idiosyncrasies of inflow and outflow timings can result in infuriating levels of penalty charges.
But capping these fees does not eliminate them. These new rules mostly reduce the size of the penalty once it has already been triggered. Don’t get me wrong – it’s a giant step in the right direction, but research published in The Journal of Finance last year suggests a behavioural intervention could prevent getting them in the first place.
The study tracked 1.1 million banking customers at two major British banks to test automatic enrolment into text alerts tied to overdraft risk. These “just-in-time” text alerts reduced unarranged overdraft and unpaid-item charges by 17 to 19 per cent. And across the U.K. market the total savings were estimated to be between £170-million ($315-million) and £240-million per year in avoidable charges.
These “just-in-time” alerts were text messages sent when risk became immediate, such as when a customer had entered unarranged overdraft or when the next scheduled payment was about to be declined but there was still time to move money to avoid triggering fees.
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This is relevant to Canada because federally regulated banks already have to send electronic alerts when the balance of a chequing or savings account falls below $100 (or an alternative amount set by the client). That’s more like an early-warning detection system. But the research suggests that an even better option would be a deadline-based alert tied to a specific pending charge.
The next evolution of alerts could even include hyperspecific information that also informs the consumer of the amount that needs to be transferred in order to save on a specified penalty amount about to be incurred.
But there are limits to what alerts can do. The authors of the research found that the alerts they tested eliminated less than half of all overdraft charges arising from inattention – as opposed to deliberate overborrowing. And of course, with such a loss in revenue to banks from NSF fee capping, does that lead to attempts to increase fees in other ways?
Ottawa’s new cap is a sensible fix. Nobody should be hit with a $50 fee because they were five dollars short. But the bigger lesson from the research is about design.
Good consumer protection is not only about lowering the charge, but also encouraging the use of the combination of psychology and technology to help people avoid incurring the avoidable charges in the first place.
Preet Banerjee is the creator of YourMoneyDegree.com, a financial literacy program with an AI companion app.
