Canadians living paycheque to paycheque will soon face a smaller penalty when money runs short. Ottawa is capping non-sufficient funds (NSF) fees on personal deposit accounts at $10, effective March 12, down from charges as high as $48.

The new policy also prohibits multiple NSF charges within a two-day period and disallows fees when an account is short by less than $10. The government estimates Canadians will save approximately $4.1 billion over the next 10 years.

Advocates say the reforms will especially benefit renters, single parents, gig workers and those struggling to make ends meet, who are more likely to face repeated penalties when they fall behind on payments.

“A lot of our members have struggled with this,” said Nichola Taylor, chair of New Brunswick Acorn and a member of Acorn Canada’s national board, a membership-based advocacy group representing low- and moderate-income Canadians that says it has been pushing for more than a decade to curb NSF fees.

When someone is scraping by financially and doesn’t have enough money in their account to cover a bill, the penalty pushes them further behind, trapping them in a cycle of repeated bank charges, she said, adding that the impact “can be catastrophic.”

Elizabeth Mulholland, CEO of the nonprofit Prosper Canada, said the burden is compounded by the way low-cost bank accounts are structured. These accounts often come with strict monthly transaction limits, added charges for certain services, and fewer features, making it easier for users to lose track and trigger extra fees.
Mulholland also pointed to broader access issues. Canadians can be charged each time they use an out-of-network ATM, yet banks and credit unions have withdrawn from low-income neighbourhoods in cities and from many rural communities.

“One of the rationales for having high NSF fees is to incentivize customers not to go over their limits. But, if you’re setting up the rules of the game so that people are driven to go over their limits … then you kind of break the game. It’s not fair,” Mulholland says.

While advocates argue the fees have disproportionately hurt low-income Canadians, Cristian Bravo, professor and Canada Research Chair in banking and insurance analytics at Western University, says the decision to cap rather than eliminate NSF fees reflects a view that a small charge can serve as a deterrent.

Research in behavioural economics suggests that even a modest fee can encourage consumers to monitor their accounts more closely, he adds. The idea is to strike a balance between protecting consumers and maintaining an incentive to avoid overdrawing accounts.

Bravo said there were fears that when similar changes were introduced in the U.K., Australia and by some U.S. banks, institutions would offset lower NSF fees by raising other charges. However, he says he hasn’t seen broad evidence that this occurred.

Even so, he warns, financial regulators should keep an eye on banks to ensure they don’t reduce services to low-income individuals after these changes take effect. Yahoo Finance