In another study by the FDIC, almost 75% of consumers had no non-sufficient funds occurrences in a year, and another 12% had between one and four NSF items, meaning that about 87% of consumers had less than four NSFs in a year.
While most people don’t abuse, or aren’t abused by, non-sufficient fund (NSF) overdraft policies, the most vulnerable people do, and are. Imagine a chart where the x-axis is consumer income (low to high) and the y-axis is fees generated from overdraft, it looks like a big crooked smile, where a large percent of the 13% of 4+ NSFers are lower-income people, often the underbanked.
This is not to say banks shouldn’t offer the service or that the service involves risk, and therefore cost. This is merely to say that it is important to design these “courtesy” products in such a way as to provide long-term value to the customer, not just short term convenience and fee income. Rather than artificial rate caps, or annual maximum overdrafts, I think regulators should require building in features that provide longer-term value, to both parties. A credit building opportunity, for example, with clear communication up front to that end. Or part of the fee as a savings deposit.
I recently spoke to an executive at Citizens Bank, who promise $1000 in addition to interest for those who open a home or college savings account and who commit and follow a savings pattern. What’s cool is that they show the $1000 in the account from day one, thus deflecting the smallness of an account in the early days and the temptation to withdraw the money early, as a result. So, after one month, your balance would show as $1025, instead of $25. It’s a promise of future value, but one with important behavioral implications in terms of our ability to stick with it.