MILWAUKEE—For many credit unions, overdraft programs are a source of discomfort—seen either as a necessary evil or something to be quietly scaled back in the name of member-friendly practices. But according to J. Paul Leavell, that narrative is missing critical context.
Overdraft, NSF, and courtesy pay programs have long been controversial. While regulators have vacillated between permissiveness and restriction over the years, the industry itself has become polarized—some credit unions lean in aggressively, while others feel embarrassed to even offer the service. What's often lost in the debate is a clear understanding of why members use overdraft—and how it's often a calculated.
“It feels as though the industry believes using this source of revenue is binary: You either go all in, or you minimize it,” said Leavell, strategic advisor at Raddon, a Fiserv company. “But there are many dimensions to consider.”
The Strategic Overdrafter: A Use Case Credit Unions Overlook
Many in the credit union space assume overdraft usage is the result of poor financial habits or desperation. But that view, Leavell argued, is incomplete. In fact, some members use overdraft knowingly and strategically—especially small business owners and self-employed individuals managing irregular cash flow.
“I’ve seen members pay $10,000 a year in overdraft fees to avoid hiring a $30,000-a-year bookkeeper,” Leavell said. “That’s a deliberate choice, and in their eyes, a sound business decision.”
Rather than viewing overdraft users as irresponsible or predatory targets, Leavell suggested credit unions start asking deeper questions about intent and alternatives.
Misconceptions Around Who Uses Overdraft—And Why
One persistent myth is that overdraft programs disproportionately target the poor. While low-income individuals do incur more overdrafts than high-income counterparts, Raddon data shows the strongest correlation is with age, not income. Most habitual overdrafters stop the behavior by their 40s.
According to Raddon research:
- Over 60% of members in segments such as “credit driven” and “middle market” have had overdrafts in the past two years, averaging 2.6 to 2.8 transactions
- Less than 34% of members in “upscale” or “depositor” segments had overdrafts, averaging less than 1.5 items
It’s not just about income level—it’s about life stage, experience with money management, and access to alternatives.
The Better Alternative To Payday Loans?
If overdraft programs didn’t exist, what would members facing short-term financial crunches do? Leavell pointed to a grim alternative: payday lending.
“Payday lenders often charge $15 per $100 borrowed, with repayment due in two weeks. That equates to an APR of around 400%,” he explained.
By contrast, an overdraft fee spread over 30, 45, or 60 days may result in APRs as low as 52%, 35%, or 26%, respectively—still high, but far more reasonable. And it comes with built-in conveniences like debit card access, real-time funding, and longer grace periods before charge-off.
For members without access to traditional credit, overdraft can serve as a vital, if imperfect, safety net, Leavell said.
What Should Credit Unions Do?
Leavell’s key recommendation is simple: stop treating overdraft like a moral failure or binary decision. Instead, credit unions should take a nuanced approach—understand who’s using overdraft and why, and design programs that are both ethical and practical.