Many banks have already changed their overdraft policies in response to competition, as we’ve noted, but a rule would leave them with less room to maneuver. Hallmarks of market-driven overdraft innovation were grace periods for repayment and an overdraft allowance before a fee or penalty. But, as IntraFi’s data suggests, a ceiling on overdraft pricing for the 153 banks and 21 credit unions with $10 billion or more in assets would most likely force other FIs to reprice overdraft fees directly. That, in turn, would push institutions to focus on recovering lost revenue and managing the cost of compliance. Especially given other fee-related rules in the mix, FIs may just make up the difference by raising maintenance fees and minimum balances on deposit accounts.

However, there is an opportunity to actually drive innovation for those who think creatively. For example, one way is tied to how lines of credit are paired with deposit accounts. With fees capped or nixed, FIs would have less of an incentive to nudge customers toward overdraft products. In such a world, an alternative profit driver might be a noncard, small-dollar, flat-fee buy now, pay later (BNPL) product marketed alongside deposit accounts. Consumers would have to make the choice to use it, but as the growth of BNPL providers has shown, with the right marketing and ease of use, gaining adoption isn’t a problem. They may also turn to value-added services like wealth management, placing complementary ads in digital banking, or cross-selling partners’ products for a fee.

The days of overdrafts as we know them may end, but there are prospects for FIs willing to think outside the box. FIs that hold back overlook how competitive dynamics could change because of the final rule, leaving them unprepared for the business impact.