Can reducing friction help people avoid overdraft fees?

Background

Almost all overdrafts (90%) are unintentional. Worse yet, they’re rarely a one-time mistake – 54% of Americans overdraft 2-5 times and 14% overdraft 6-10 times. And, it’s not getting any better. Americans paid over $34 billion in overdraft fees in 2017. Average overdraft fees have steadily risen from $22 to $34 per overdraft in the last 20 years.

If given the option, most people (75%) would want their overdraft transactions declined. We partnered with the financial technology app Charlie, which focuses on helping people better manage and improve their finances in order to find effective ways to help users reduce or avoid overdraft fees.

Key Insights

There are only a few ways that people can avoid overdrafts:

• Link savings account: Have a different account automatically cover the overdrafting account. However, this necessitates a non-zero balance in the covering account and may result in an overdraft transfer fee.

• Monitor account balance: Monitor your account balance. However, this requires timely information often not processed quickly enough by banks.

• Change banks: Change banks to an institution that doesn’t charge overdraft fees.

• Opt out of overdraft protection: When you opt out of overdraft protections, your overdrafting transactions will be declined.

Our team focused on the last two options. These options are both one-time decisions a user can make that will have long-term effects on reducing their total fees. Ultimately, we prioritized “opting out” as the recommended path for most Charlie users because doing so is a simpler action than changing banks.

To better understand the process, we investigated the opt-out process at a variety of popular banks. We found that opting out may be simpler than changing banks, but it isn’t inherently easy. We identified several behavioral barriers a user would face, including:

• Confusing language: “Opting out of overdraft protection” is intuitively difficult to understand. Terms like “overdraft protection” and “overdraft coverage” are often conflated but mean different things.

• Opt-out is framed as a loss: Banks say things like, “[You may] still face returned item fees.” “we will void your ATM privilege.” or “you lose free checks.” One bank told us we were about to “downgrade” our account.

• It’s just hard to do: Banks use logistical friction to make it hard to opt out, requiring multiple clicks and, in some cases, even a phone call.

Experiment

To make it easier for people to reduce overdrafts, Charlie and The Common Cents Lab tested sending Charlie users overdraft opt-out messages. An initial message and a reminder were sent to the users that incurred an overdraft fee and included an opt-out button that linked to the appropriate page of the user’s bank.

About 4,000 Charlie users were randomized to receive messages that drew on one of two different frameworks. Users that were part of the control received no message.

Results

We found that intervening with opt-out messages was successful. The experimental conditions resulted in a net overdraft reduction of ~$23 per person (p < 0.05). A $23 reduction in overdraft fees equates to a 9% reduction in people’s total annual overdraft fees. The experimental intervention reduced gross overdrafts by ~$20. (p < 0.067). While both experimental conditions reduced overdrafts, there was no statistically significant difference in the success of the two messages. Around ~20% of users in both conditions clicked the initial message. For reminder messages, however, the fairness-and- injunctive-norms condition was significantly more successful, resulting in more clicks.

This overall effect was primarily driven by the treated group. People who clicked on the opt-out button had lower gross overdrafts by ~$36 (p < 0.011). However, we also found a benefit for those who didn’t click through opt-out messages.

While this group did not lower gross overdrafts, they did pursue refunds more frequently, resulting in an average of $5 more in refunds than the control group.