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Canada’s Federal Budget Aims to Curb Overdraft Fees

Canada, parliament, legislation

Canada’s federal budget, released this week, includes a proposal to limit the fees that banks charge customers for overdrawing their accounts.

This move is expected to provide relief for low-income clients but could potentially impact the revenue of Canadian banks, Bloomberg reported Thursday (April 18).

The proposed cap would be 10 Canadian dollars ($7) for non-sufficient funds (NSF) fees. Currently, major Canadian banks charge penalties ranging from 35 Canadian dollars ($25) to 50 Canadian dollars ($36) when customers’ accounts do not have enough funds to cover a check or pre-authorized debit payment, according to the report.

While it is difficult to determine the exact impact of the proposed cap, service fees account for about 2.5% of total revenue for most lenders, the report said, citing Gabriel Dechaine, an equity analyst with the National Bank of Canada.

However, these fee incomes also include a range of charges for both business and personal customers, and banks already offer some protections against overdraft charges. Dechaine suggested that the at-risk NSF fees could amount to 1% or less of total bank revenues, per the report.

This crackdown on overdraft penalties is part of Prime Minister Justin Trudeau’s government’s broader efforts to address “junk fees,” according to the report. The government is also targeting hidden charges in online marketing, such as those related to airline and concert tickets.

Anti-poverty group Acorn Canada has welcomed the planned cap on overdraft charges, stating that it provides relief for the most vulnerable Canadians, the report said.

The Canadian Bankers Association is currently reviewing the government’s budget to assess its implications, per the report.

There has been a similar debate in the United States, where the Consumer Financial Protection Bureau (CFPB) issued a proposal in January that would close an “outdated loophole” that exempts overdraft lending services from consumer protection laws.

The CFPB proposal would cap fees at $3 and save consumers $3.5 billion per year. The rule would apply to banks with more than $10 billion in assets, a category that covers the 175 largest financial institutions in the U.S., the agency said.

However, there are nuances to the debate, PYMNTS reported in January. For example, overdraft fees are an opt-in choice for consumers. As detailed by the American Bankers Association, 83% of consumers say their banks are transparent about disclosing fees, and 89% say that bank overdraft offerings are “valuable.”