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Understanding Consumer Choice: A Review of Consumer Overdraft Behaviors

Executive Summary

Since the introduction of new regulatory requirements in 2010, consumer overdraft fees have fallen by as much as 45% depending on peak estimates. Nevertheless, some overdraft critics are calling for, and some regulators are considering, new prescriptive controls on the use of overdraft — e.g., additional disclosure, further process controls, and pricing restrictions. Many proponents of new controls argue that overdraft usage is a result of consumers making ill-informed choices.

Despite all of the concern about overdraft, commentators have provided limited direct consumer research to date on why consumers use overdraft as opposed to their behaviors. To fill the gap, Novantas executed a survey to understand whether and why consumers choose to opt-in and use overdraft. The survey found that most current overdrafts come from an informed choice of consumers.

Many of the proposed prescriptive controls would run counter to consumer choice revealed in the survey research, and would likely reduce the availability of overdraft options for consumers who want and rely on them most, causing many to turn increasingly to less regulated alternatives. A more productive regulatory agenda should begin by recognizing the right of consumers to make informed short-term credit choices, and then work with banks to provide consumers with effective information and more, not fewer, options to meet their payment and liquidity needs. Specifically:

  • Supporting consumer choice, by maintaining current overdraft requirements of affirmative consent (“opt-in”) for debit card overdraft, and negative consent (“opt-out”) for transactions where consumer would otherwise pay NSF and/or return transaction fees;
  • Improving information for consumer choice, by simplifying and streamlining checking account disclosure — which is the most direct and timely way of informing consumers; and
  • Supporting consumer choice, by encouraging new product development, and not restricting or homogenizing current overdraft options by way of prescriptive pricing and controls.

By supporting informed consumer choice as the basis of competition, banks will serve their consumers better and ensure a healthier and more competitive financial services industry.

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