On the Limits of Nudging

August 4, 2014 at 8:54 am Leave a comment

On Friday, the CFPB released its latest report of consumer overdraft practices and it confirmed what I’ve heard from credit unions for years. A disproportionate number of overdraft fees are incurred by a relatively small number of members who choose to incur the added expense of overdraft protection to avoid the embarrassment and inconvenience of a bounced check. At the risk of sounding like a lackey for “The Man,” overdraft fees are legitimate products that some members want. As long as members are knowingly opting into receiving such coverage – and they are – let’s move on to other more relevant consumer protection issues.

We should be so lucky. Richard Cordray, who heads the Bureau that never sleeps, looks at the same survey results – which were gleaned from a large sampling of the account activities of the large banks it oversees – and concludes: “[t]oday’s report shows that consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card. . . Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be ‘gotchas’ when people use their debit cards.”

The CFPB noted that since your average debit card overdraft is $24 or less and is quickly replenished by the account holder, your typical fee is equivalent to a loan with an APR of 17,000%. It noted with approval that some credit unions and banks don’t charge fees for overdrafts below a certain amount and cap the amount of fees that can be charged on a given day.

Before I get too sarcastic, the Bureau deserves credit for looking beyond the generalities and gathering actual data on important issues. I just wish it would reach more logical conclusions about its own research.

As I have explained before, the Bureau proudly proclaims itself the first agency that is trying to put behavioral economics to work for the benefit of the American consumer. Proponents of this approach point to the impact that subtle changes such as making employees affirmatively “opt out” of retirement plans or making consumers “opt in” to more expensive banking services can have on consumer behavior. Fair enough. But, I’ve always been suspicious that adherents of this view will remain so only as long as consumers make what they consider the “right” decision.

For example, the overdraft study results show that a relatively small number of young people account for a disproportionate amount of overdraft fees. As people get older they opt in to debit overdrafts in much lower numbers and incur fewer overdraft fees. Is the relative handful of serial over drafters simply not getting the right nudge? Are they being victimized by financial institutions looking to maximize their non-interest income? Or is it possible that your average young person today fresh out of college and handling finances for the first time doesn’t balance his checkbook, uses the debit card almost exclusively and logically concludes that, a friendly nudge notwithstanding, overdraft protection is for them?

Entry filed under: Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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