Over the years, the Pew Charitable Trusts has devoted a considerable amount of time to analyzing checking accounts. Some of the recommendations from their studies appear valid. For example, I agree with Pew on the need for easily understood disclosures. But I take issue with its analysis of overdraft services and its conclusion that regulatory reform is needed (as discussed in this BankThink piece).
When it comes to determining the need for more regulations on overdrafts, there seems to be an ideological divide, with the consumer advocates on one side and some banking industry organizations on the other side. It got me wondering: Would the Consumer Financial Protection Bureau's complaint database reveal any unique insights?
For a proper analysis, the first question that should be considered is whether the CFPB's complaint database is a true representation of consumer sentiment when it comes to overdraft services. Asking for a "complaint" — a negative — will result only in negative feedback. If there are, as the database shows, more than 8,000 instances of people complaining about issues caused by "funds in my account being low," how many positive comments would the CFPB have received if it had asked for only compliments for the last four years?
Pew contends the CFPB database validates a need to reform overdraft policies and fees. It specifically states that one in four "bank account or service" complaints is related to overdrafts. But put that in the context of all the complaints in the database, and a different perspective emerges. When we downloaded data from the CFPB complaint database in December, here is what we found:
- 489,000 total complaints had been submitted.
- 8% of the complaints were about checking accounts.
- Mortgages (35%), debt collection (18%), credit reporting (16%) and credit cards (12%) collectively showed 10 times more complaints than checking accounts.
In my estimation there are about 1.3 billion overdraft occurrences a year, so somewhere around 5 billion occurrences in the lifetime of the complaint database. With that in mind, 8,094 complaints tagged as problems caused by a person's funds being low represents a complaint ratio of 0.00015%. Viewed this way, the statistics do not seem to validate Pew's conclusion that more overdraft regulation is needed.
That said, let's explore an issue Pew specifically cites in regard to overdrafts. That is, "the burden is not evenly distributed by age, income, and race."
My company has analyzed millions of actual checking accounts at community banks over the past decade. This research shows that in most cases people make an informed and even rational decision regarding the use and expense of the overdraft option. It may not seem rational to the majority of customers, who have no overdrafts in a typical year, but there is considerable evidence that those who use the service typically choose to do so and have a reason for doing so.
If it supposedly is true that overdraft services are more frequently used by people in certain age or race groups, what would the result be if financial institutions did not offer that service and instead declined the transactions that would cause an overdraft? Would the headline say, "Younger customers as well as certain race segments experience more transaction declines"?
We have analyzed "high users" of overdraft services, which we define as those overdrawing an average of more than twice a month. These high users deposit on average nearly 30% more dollars than the average customer into their checking account each month.
There are two conclusions from Pew with which I agree. Clear disclosure is helpful and should always be encouraged, maybe even standardized. Providing other short-term liquidity solutions as options is another sound recommendation.
Offering choices and clear disclosure should lead to customers being able to select the best option for their individual needs. Regulated pricing, on the other hand, will never get us to the best solution for the consumer.
Achim Griesel is chief operating officer at Haberfeld Associates, a Lincoln, Neb.-based bank consulting firm that focuses on customer acquisition marketing and profitability. He can be reached at email@example.com.