Overdraft charges have been criticised, restricted and redesigned repeatedly, and they remain a significant source of retail banking income. The persistence is structural.
The free account has to be paid for somewhere
Running a current account costs money: payments infrastructure, branches, fraud monitoring, card issuance and regulatory reporting all consume resources whether or not the customer pays a monthly fee.
In markets where accounts are advertised as free, that cost is recovered from interchange, from the margin on deposits and from penalty charges levied on a minority of customers.
Overdraft income is the most concentrated of those. A small share of account holders generates most of it, which is precisely why it can subsidise everyone else.
The charge is priced as a service, not as credit
An unarranged overdraft is a very short loan of a small amount, and a flat fee on it translates into an enormous implied annual rate.
Banks have historically described it as a service charge for processing a payment that would otherwise have been refused, which frames it outside conventional lending comparisons.
That framing matters because rules written for credit products do not automatically capture something classified as a transaction fee.
Reform tends to relocate the cost
When regulators cap or ban one form of charge, the shortfall does not disappear. It reappears as a monthly account fee, a higher interest rate on arranged overdrafts, or reduced free banking.
Each of those spreads the cost across more customers, which is arguably fairer and is also less visible.
The visible version generates complaints and headlines; the diffuse version generates neither, so reform often trades one for the other rather than eliminating the underlying charge.
Ordering rules amplify small shortfalls
When several payments hit an account on the same day, the order in which they are processed determines how many are counted as exceeding the balance.
Processing the largest first can push several smaller ones into overdraft, turning a single shortfall into multiple fees. Rules on this have tightened, but the mechanism explains why charges once stacked so quickly.
Timing compounds it. Deposits and debits clear on different schedules, so an account can be technically overdrawn while money is already on its way in.
Why alternatives have only partly displaced it
Buffers, grace periods and instant alerts reduce accidental overdrafts, and app-based banks compete openly on having fewer penalties.
But customers who rely on overdrafts are often those with the least room to switch, and the accounts they can open elsewhere may offer less credit rather than cheaper credit.
The fee survives because it sits at the intersection of a product priced at zero and a group of customers with limited bargaining power.