New perspective on overdraft customers emerges

“Victim” summarizes the common view among consumerists and some regulators concerning fee-based overdraft protection programs. ABA recently shared consumer data with the Consumer Financial Protection Bureau that throws that stereotype into serious question.

In a detailed letter following up as ABA’ visit to CFPB headquarters, the association reflected that a 2006 FDIC study about overdraft programs used census tract income designations as a proxy for determining the income of users of the service. The conclusion drawn by the research was that customers in lower-income areas were more likely than customers in higher-income areas to have to pay overdraft charges. In some areas, the median annual income level indicated was $30,000.

“Consumer advocates, the media, and even the Bureau’s whitepaper [on overdraft services] have relied on this … to assert that consumers from potentiall vulnerable groups shoulder a disproportionate share of overdraft fees,” ABA wrote. “ABA’s Consumer Survey, however, refutes this finding.”

Overdraft programs have been scrutinized by Congress, FDIC and other traditional banking regulators, and by CFPB since its founding. For some time now, ABA has been conducting research along several lines in relation to overdraft programs. Association representatives presented key findings from a survey conducted by an ABA-engaged research firm among 501 customers of 12 community banks. The customers’ common ground—which classified them as “regular users”—was that all in the sample had overdrawn at least six times in a 12-month period.

Key findings of the research (available to members only), drawn from ABA’s letter:  

•  The majority of regular users would be considered middle income or higher. The survey found that only 12% reported annual income of less than $30,000. (One in three respondents would not provide income information.)

• As opposed to the cliché view that they are uneducated, nearly three out of four respondents said they have at least some college education. And nearly half are college graduates. “Thus, regular users are considerably more educated than members of the U.S. population as a whole,” ABA wrote.

• The majority of respondents consider overdraft service to be a financial management tool. ABA said that 46% of regular users value overdraft because it helps ensure that important bills are paid. And one in three use it “to avoid the embarrassment or frustration of having debit charges declined.”

“In addition, 33% of regular users ranked the choice that overdraft protection may help them avoid merchant bounced check fees among their top two reasons for having the service,” ABA wrote.

• Many users prefer overdraft plans to interest-based overdraft lines of credit or transfers from savings. Among the sample, 55% could have a credit line, but 85% of them “never” or “rarely” use that service. And many resist the chance of losing ground in savings efforts by having savings drawn down to pay overdrafts.

Overall, ABA stated, “The Consumer Survey revealed that overdraft protection provides an important liquidity bridge for middle income consumers who are increasingly challenged to make ends meet.” And many respondents said they would have no viable banking-system options for emergency credit should overdraft service be eliminated.