The Economics and Regulation of Bank Overdraft Protection

59 Pages Posted: 20 Oct 2011 Last revised: 8 Oct 2014

See all articles by Todd J. Zywicki

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty; PERC - Property and Environment Research Center

Date Written: October 19, 2011


Consumer use of bank overdraft protection has risen rapidly over the past decade, leading to increased scrutiny and the imposition of new regulations. Public and political debate regarding overdraft protection has highlighted anecdotal stories about irresponsible college students who overdraw their accounts to buy a cup of coffee, thereby triggering substantial overdraft fees. But there has been little systematic examination of the safety and soundness or consumer protection issues implicated by the increased use of overdraft protection.

Available evidence indicates that those who rely on overdraft protection tend to have low credit ratings, use overdraft protection because it is sometimes less expensive, to maintain short-term liquidity needs, and more convenient than available alternatives. These alternatives include other credit options, such as payday lending, or options such bounced checks or dishonored payments, which may result in eviction or termination of utilities or other services.

There is also no evidence that those who use overdraft protection are unaware of the cost or otherwise use overdraft protection foolishly or unknowingly. In addition, there is no evidence that banks are earning economic rents off the issuance of overdraft protection, as increases in overdraft revenues have been offset by dramatic increases in free checking, improved quality, and free services offered to bank customers. A serious reduction in overdraft revenues would reverse all of these trends and result in many consumers being driven out of the mainstream financial system, especially low-income consumers.

Absent a demonstrable market failure or demonstration of systematic consumer abuse, restriction on consumer choice of overdraft protection would likely impose substantial costs on consumers and banks with minimal gains.

Keywords: ATM, American Bankers Association, Brian Melzer, CFPB, Consumer Financial Protection Bureau, Dodd-Frank Financial Regulatory Reform Legislation, Donald Morgan, FDIC, Federal Deposit Insurance Corporation, Moebs Services, OCC, Office of the Comptroller of the Currency, Raddon Financial Group, Reserve

JEL Classification: G21, G28

Suggested Citation

Zywicki, Todd J., The Economics and Regulation of Bank Overdraft Protection (October 19, 2011). Washington and Lee Law Review, Vol. 69, No. 2, 2012, pp. 1141-1200; George Mason Law & Economics Research Paper No. 11-43. Available at SSRN: or

Todd J. Zywicki (Contact Author)

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