Competition Drives Overdraft Disruption

Executive Summary

Overdraft, the fee-based service that enables consumers to make debit transactions in excess of their available account balances, attracts significant attention from financial institutions, consumers, consumer advocates and policymakers. These stakeholders generally try to balance consumer needs, financial well-being and program transparency with the cost (both reputational and financial) of providing effective programs.

The change in the U.S. political leadership and the COVID-19 pandemic have drawn fresh attention to this issue as millions of Americans struggle with urgent financial needs. Those pressures, combined with the introduction of new overdraft products and policies, required a new round of research on this important topic. This research both confirms and expands upon previous work by regulators and consumer advocates.

The research findings indicate that intense competition in financial services is driving many of the recent changes in overdraft policies and programs.

Key Findings

1. Overdraft fee revenue is down significantly. U.S. overdraft revenue fell approximately 57% from $40 billion in 2008 to $17 billion in 2019.
2. Fewer people use overdraft. The percentage of regular overdraft users (those with 10 or more transactions annually) fell by 40% to 4.9% Of the population between 2010 and 2020.
3. Challengers adopt consumer-friendly policies, win market share. New entrants, including fintechs and challenger banks, have created solutions to better manage or reduce the cost of overdraft. These entities have experienced a 40% improvement in account acquisition since 2017. Financial institutions that haven’t adopted overdraft innovation have experienced a nearly 30% reduction in consumer acquisition.
4. Consumers understand overdraft. Consumers, especially overdraft users, continue to demonstrate a deep understanding of overdraft and available alternatives. More than 60% of overdrafts come from consumers who intend to use the service. More than 80% of overdraft transactions come from consumers who opted in to debit card overdraft programs with the clear intention of using it to cover their payments. And two-thirds of consumers indicate that, while overdraft can be expensive, they don’t want to see reductions in their access to the service.
5. Consumers want more short-term liquidity choices. Consumers seek convenient and relevant alternatives to overdraft. The emergence of alternatives in the market is driving consideration of new checking purchases.
6. Larger transactions now trigger overdraft. The proliferation of overdraft grace balances and changes in posting order practices have reduced the number of small purchases that are tied to overdraft. As a result, the average size of purchases that trigger overdraft fees has nearly quadrupled from $50 to almost $200.

Innovation and Account Acquisition