Frequent Overdrafters

Abstract

Consumers with checking accounts sometimes attempt transactions for amounts that exceed their account balances. Financial institutions that offer checking accounts decide whether to allow such transactions to go through and whether to charge fees in connection with them. These decisions depend on a number of factors, including the type of transaction, the financial institution’s policies, procedures, and technological systems, and federal regulatory requirements.

In a 2014 Data Point published by the Consumer Financial Protection Bureau’s Office of Research, the authors analyzed consumers’ experiences with overdrafts at a number of large banks. This Data Point focuses on accounts with frequent overdrafts or NSFs. We define “frequent” overdrafters as accounts with more than 10 overdrafts and NSFs combined in a 12-month period. For our analysis, we used a de-identified dataset consisting of credit record data joined with transaction- and account-level data from several large banks that were among those banks previously studied in the 2014 Data Point.

Key findings of this report include:

• Frequent overdrafters account for nine percent of all accounts at the study banks but paid 79 percent of all overdraft and NSF fees.6 Very frequent overdrafters account for about five percent of all accounts at the study banks but paid over 63 percent of all overdraft and NSF fees.

• Frequent overdrafters tend to be more credit constrained than non-overdrafters or infrequent overdrafters. Frequent overdrafters generally have lower credit scores and are less likely to have a general purpose credit card. Those that have a general purpose credit card have less available credit on such cards than non- or infrequent overdrafters.

• In our full sample, the dollar amount of monthly deposits into a checking account is not strongly correlated with the number of overdrafts or NSFs incurred. Once we exclude low-activity accounts, however, we find that overdrafters have lower median deposits than non-overdrafters. The variability in monthly deposits is not strongly correlated with the number of overdrafts or NSFs incurred, even after excluding low-activity accounts.

• The account usage characteristics and circumstances of frequent overdrafters vary considerably, which we capture by using a formal method to distinguish six groups of frequent overdrafters.

• Frequent overdrafters who are opted-in appear similar to frequent overdrafters who are not opted-in along a number of dimensions but differ markedly in the number of overdraft fees they incur.

Note: This is another in an occasional series of publications from the Bureau of Consumer Financial Protection’s Office of Research. These publications are intended to further the Bureau’s objective of providing an evidence-based perspective on consumer financial markets, consumer behavior, and regulations to inform the public discourse.