KC Fed Study Suggests Responsible Use of Overdraft Feature (Nov. 24, 2014)
In a new study, the Federal Reserve Bank of Kansas City is providing some much-needed data to the long-standing debate over whether prepaid cards should be permitted to offer an overdraft feature. “Recurrent Overdrafts: A Deliberate Decision by Some Prepaid Cardholders?” found that among overdraft-eligible cardholders, a small fraction of them ever actually overdraws, and those who do, often avoid fees for doing so, or overdraw deliberately.
The analysis, based on data furnished by prepaid card provider NetSpend—one of few providers that offers an overdraft program—showed that a small percentage (4.5 percent) of eligible GPR prepaid cardholders ever have had an overdraft transaction more than $10 or incurred overdraft fees (3.9 percent). Those who have overdrawn their accounts tend to load and spend more funds on their cards. These overdrafters also use their cards longer than cardholders who do not make overdraft transactions, leading the authors to posit that overdrafters were making a conscious decision to use the service.
Consumers’ limited attention to their balances has been touted as one of the causes of overdrafts. The NetSpend data, however, revealed that overdrafters are more likely to use email communication, text message alerts, online account access portals and telephone customer service to keep track of their balances. “These results suggest that overdrafters are at least better armed with tools that help them keep track of their account balance than are non-overdrafters,” the report explains.
Despite pressure from consumer groups, which argue that overdraft fees can cause financial harm to account holders, the CFPB did not suggest a ban of overdraft in its recently released notice of proposed rulemaking on prepaid accounts. Proponents of overdraft features connected with prepaid cards say overdraft provides consumers with access to convenient short-term loans that are less expensive than alternatives, such as payday and auto title loans.
The report authors Fumiko Hayashi and Emily Cuddy suggest further research is needed but say their data pose interesting questions for policymakers examining overdraft, including “Do very short-term (24-hour) loans help maintain cash flow for cardholders or can they be avoided if cardholders pay more attention to their card account balance?”
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