One in all my largest pet peeves in all of finance is the overdraft charge. I first wrote in 2019 that we have been shifting to a world of no overdraft charges. This was earlier than main banks modified something in response to the fintech push for no overdraft charges.
By 2021, it was clear that we had reached a tipping level on overdraft charges as many main banks both eradicated the follow or decreased the quantity of their charges. That is partly because of the CFPB and their focusing on of so-called “junk charges” like overdrafts. This has resulted in a dramatic drop in overdraft income for banks.
With this backdrop, I used to be involved in receiving an replace from the Monetary Well being Community on overdraft charges as a part of their annual FinHealth Spend Report (the total report shall be out later this month). This report examines family spending on varied monetary merchandise resembling overdraft, payday and pawn, bank cards, and auto loans.
There have been some very attention-grabbing findings on this report:
- 17% of U.S. households reported having overdrafted in 2022, unchanged from 2021
- 46% of Financially Susceptible households reported paying an overdraft or NSF charge in 2022
- 9% of U.S. households that overdraft reported doing so greater than ten instances
It’s the final level I wish to deal with right here. For the inhabitants who overdraft quite a bit (greater than ten instances a yr), 35% of them mentioned their final overdraft was intentional. So, they’re utilizing their checking account for short-term and expensive funding. In case you are speaking APRs, any such funding can go as excessive as 18,000%—no marvel the CFPB is cracking down on the follow.
For small transactions, these lower than $25, 60% of respondents would have fairly had their transaction declined than ship them into an overdraft. However which means 40% of individuals are nice paying a $35 charge for overdrawing their account by lower than $25.
We’re shifting in direction of a greater system for overdrafts
Many fintech corporations supply short-term financing when cash is required. Dave pioneered this product, however corporations like Chime, Varo, MoneyLion, and Present all supply inexpensive small-dollar financing or fee-free overdrafts.
The report additionally shared that 81% of households overdrafted greater than 10 instances in 2022 desire to incur a charge fairly than have the acquisition or cost declined. So, these individuals residing on the monetary edge are completely happy to pay a charge, however they really want a program that helps them get again on their ft.
It seems like we’re in a transition interval proper now. The outdated overdraft system has been chipped away by fintechs, with many banks now leaping on board to supply no overdraft charges. However we’re not but the place essentially the most financially unstable individuals can depend on their monetary establishments to offer cheap choices.
I wish to see a world the place no monetary establishment could make vital cash in charges off essentially the most weak subset of their buyer base. It ought to not be costly to be poor. We’re on our solution to this world, however extra work must be carried out. This new report from the Monetary Well being Community makes that clear.