An overdraft charge is levied when an account goes below zero, which sounds like a straightforward penalty. The pricing structures that developed around it are considerably more deliberate than that.
The bank is making a short, unsecured loan
Paying a transaction when the balance is insufficient advances the bank's own money, without security and without any assessment at the moment it happens.
The advance is usually small and repaid within days, so any interest charge at a plausible annual rate would amount to very little.
Fixed fees rather than interest therefore became the norm, and a fixed fee on a small, short advance corresponds to an extremely high effective rate.
Ordering of transactions changes the total
When several transactions clear on the same day, the order in which they are processed determines how many push the balance below zero.
Processing the largest first can exhaust the balance early, so several small transactions each incur a fee that would not have arisen under a different order.
This practice attracted extensive litigation and regulatory attention, and many institutions have moved to processing that minimises the number of charges.
Timing of credits matters equally, since a deposit made on the same day may or may not be applied before the debits, and the account terms rather than the calendar decide.
The charge falls on those least able to absorb it
Overdraft fees are concentrated among customers with low and variable balances, which is a direct consequence of the mechanism rather than a coincidence.
A household running close to zero can incur repeated charges in a single month, and those charges reduce the balance further, making the next shortfall more likely.
The dynamic is self-reinforcing, which is why overdraft revenue has been treated as a consumer protection issue rather than simply as pricing.
Opt-in rules changed the default
Regulators in several jurisdictions have required that customers actively choose to have certain transactions paid into overdraft rather than declined.
Declining a card transaction costs the customer nothing and costs the bank the fee, which is why the default mattered so much before it was changed.
Where the choice is presented clearly, take-up falls substantially, which indicates how much of the original revenue depended on the default rather than on demand.
Alternatives have narrowed the gap
Competition from accounts with no overdraft facility, small advance features and clearer alerts has pushed several institutions to restructure or remove the charges.
Replacing fixed fees with a single interest rate makes the cost proportionate to the amount and duration, which is more defensible and usually cheaper for small shortfalls.
Rules on ordering, opt-in and disclosure vary by jurisdiction and continue to change, so the account terms remain the only reliable description of what applies.