Most overdraft programs were built for a world that doesn’t exist anymore. Here’s how credit unions can redesign overdraft to be transparent, compliant, and member-first.
Designing Overdraft Programs Members Actually Trust
Most overdraft programs were built for a world that doesn’t exist anymore. Regulators are watching more closely, consumers are louder about “junk fees,” and members expect digital clarity in real time. Yet many credit unions still run overdraft the way it was set up a decade ago.
Here’s the thing about overdraft: done well, it’s a member service. Done poorly, it’s a reputational and regulatory liability.
Drawing on themes from Cheryl Lawson, Executive Vice President of Compliance Review at JMFA, and what I’ve seen across the industry, this post breaks down how credit unions can modernize overdraft solutions so they’re member-centric, compliant, and ready for an AI-powered future in 2026 and beyond.
We’ll cover:
- What a responsible overdraft program really looks like
- How to design transparent communications members actually read
- Where litigation and regulatory trends are headed
- How AI can improve overdraft decisions, outreach, and member experience
- Practical steps to keep your credit union relevant on this issue
1. What a Responsible Overdraft Program Really Looks Like
A responsible overdraft solution is predictable, transparent, and optional. If any of those three are missing, you’re inviting complaints and exam headaches.
Core principles of a member-centric overdraft program
From Cheryl Lawson’s perspective and what we see in leading programs, strong overdraft design usually includes:
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Clear eligibility and limits
Members should know:- When overdraft applies
- What their limit is (and that it can change)
- What triggers a fee and what doesn’t
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Simple, flat and disclosed fees
Layered or confusing fee structures are a red flag. One predictable fee per qualifying event, disclosed in plain language, is where regulators are nudging the market. -
No surprise re-ordering practices
High-to-low transaction reordering to maximize fees has been at the center of many lawsuits. If your core still posts this way, that’s a priority review area. -
Easy opt-in / opt-out
Particularly for one-time debit card and ATM transactions, members should be able to enroll or unenroll without friction, online and in-app, and see their status in real time. -
Consistent application
The compliance risk isn’t just what’s on paper. It’s whether frontline staff follow the same rules with every member, every time.
Responsible overdraft isn’t about eliminating the option; it’s about making it a conscious, informed choice that aligns with members’ actual needs.
2. Communication: Where Overdraft Programs Win or Lose
If members don’t understand your overdraft program, they’ll assume the worst the first time a fee hits. That’s where most credit unions stumble.
Plain language beats perfect legal language
Regulations require certain wording. Members require human language. You need both.
The best-overdraft programs I’ve seen use:
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Layered disclosures:
- Short, plain-English summary (what it is, when it applies, what it costs)
- Detailed legal disclosure for compliance
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Concrete examples instead of jargon:
- “Your available balance is $50. A $60 debit card purchase will be approved and you’ll pay a $30 fee, bringing your balance to -$40.”
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Visuals in digital channels:
- Simple balance diagrams in-app
- Push notifications that show balance before and after a transaction
Proactive alerts reduce complaints and calls
Overdraft is much less controversial when members feel informed and in control.
At a minimum, member-centric overdraft communication includes:
- Low-balance alerts via SMS, email, or push notification
- Real-time overdraft notifications when a transaction is covered
- “Near limit” alerts for members frequently using overdraft
AI can make these even smarter by:
- Predicting which members are likely to overdraw in the next 7 days
- Tailoring the tone and channel based on past engagement
- Recommending alternatives (short-term loan, payment plan, savings sweep) when recurring overdraft behavior appears
The goal isn’t to scare members away from using overdraft; it’s to help them use it intentionally.
3. Overdraft Litigation & Regulatory Trends Credit Unions Can’t Ignore
Overdraft has been in the regulatory spotlight for years, and that pressure hasn’t eased. Many of the largest banks have cut overdraft fees or restructured programs entirely. Credit unions are under the same microscope.
Where litigation has focused
Historically, plaintiffs’ attorneys and regulators have zeroed in on a few patterns:
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Available vs. ledger balance confusion
Members were charged fees when they believed they had sufficient funds based on what was displayed. -
High-to-low reordering
Processing transactions to maximize the number of overdraft fees. -
Poorly disclosed “extended” or “sustained” overdraft fees
Daily or extended fees that weren’t clearly explained or understood. -
Misleading marketing
Promoting overdraft protection as “free” or “automatic” when fees applied.
Cheryl Lawson’s take is blunt: if you’re not aligning your practices and your marketing with what actually happens behind the scenes, you’re at risk.
Regulatory expectations for 2025–2026
Regulators are increasingly expecting:
- Transparent, member-friendly fee structures
- Evidence of fair treatment across demographics and income levels
- Clear opt-in records and audit trails
- Data to back up your claims in policies, procedures, and marketing
This is where AI-driven compliance tools can help:
- Scanning call transcripts and messages for misleading wording about overdraft
- Flagging patterns of complaints tied to specific fee types or channels
- Automatically testing disclosures for reading level and clarity
If your overdraft program hasn’t had a thorough compliance review in the last 18–24 months, that’s no longer optional. The environment has shifted too much.
4. Using AI to Make Overdraft More Member-Centric
AI for credit unions isn’t just about chatbots. Overdraft is one of the most practical, high-impact areas to apply it.
Smarter decisioning and member outcomes
AI models can help you move from one-size-fits-all overdraft to context-aware support, for example:
- Risk-based limits: Adjusting overdraft limits dynamically based on a member’s income patterns, deposit history, and repayment behavior.
- Behavior-aware interventions: Identifying members who are using overdraft like a recurring loan and suggesting:
- A small-dollar installment loan
- A credit-builder product
- Financial counseling or budgeting tools
This isn’t about denying coverage more often. Done right, it’s about offering better alternatives for chronic users while preserving overdraft as a safety net.
AI-enhanced communication and education
This is where AI really shines in a member-centric banking strategy:
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Personalized explainers:
After an overdraft event, an AI assistant in your app can:- Explain what happened in plain language
- Walk through how the fee was calculated
- Suggest ways to avoid future fees
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24/7 overdraft Q&A:
A compliant, trained virtual assistant can answer:- “Why was I charged this fee?”
- “What’s my overdraft limit?”
- “How can I turn overdraft off?”
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Automated outreach campaigns:
AI tools can segment members into:- Occasional users who just need better alerts
- Frequent users who may benefit from alternate credit
- At-risk members where you may want human outreach
The reality? AI doesn’t replace your overdraft program; it makes it more human. Members get faster, clearer, more tailored support—at scale.
5. Keeping Your Credit Union Relevant on Overdraft
Overdraft is a litmus test for whether your institution is truly member-centric or just saying the right words. If you want to stay relevant, especially with younger, digital-first members, your overdraft strategy has to evolve.
Practical steps to modernize your program
Here’s a straightforward approach I’ve seen work:
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Audit your current overdraft experience end-to-end
- Policies and procedures
- Core processing and posting order
- Online and mobile banking displays
- Disclosures, marketing copy, and onboarding flows
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Map the member journey around a single overdraft event
- How do they learn about overdraft?
- What do they see in-app before and after?
- What notifications do they receive?
- How easy is it to get questions answered?
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Bring compliance and member experience to the same table
- Don’t treat this as only a legal project or only an experience project
- Use both compliance and UX reviews for every change
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Pilot AI-assisted tools instead of waiting for perfection
- Start with overdraft FAQs in your chatbot
- Add post-fee explanations and recommendations
- Use analytics to track complaint volume and repeat usage
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Measure what actually matters to members
- Overdraft-related complaints and call volume
- Member satisfaction after an overdraft interaction
- Changes in chronic overdraft usage after introducing alternatives
Culture matters more than the fee amount
Cheryl Lawson emphasizes service and accessibility as the heart of the credit union movement. I agree. The institutions that stand out aren’t just adjusting fee amounts; they’re changing how they talk about money stress.
A member-centric culture means:
- Staff are trained to explain overdraft without shame or jargon
- Leaders are willing to sunset outdated practices even if they’re profitable
- Digital teams prioritize clarity and control in the app, not just features
Overdraft isn’t just a product; it’s a signal of who you are as a financial partner.
Where to Go From Here
If your overdraft solution hasn’t changed in years, that’s your early warning sign. Members are comparing your experience to big banks that now advertise lower or no overdraft fees, and to fintech apps that show balances in real time with crystal clarity.
The good news: you don’t need a total teardown to make real progress. Start with transparency, smarter communication, and a basic AI layer that helps members understand and manage their accounts. Then review your program with compliance and member outcomes in mind.
Credit unions that treat overdraft as a member service, not a fee engine, will keep trust high and stay ahead of regulatory pressure. Those that don’t will be forced to change on someone else’s timeline.
The question for your team: If a member used overdraft three times this month, would they say you helped them through a rough patch—or took advantage of it?