ICYMI – OCC’s Hsu: “Limiting Overdrafts May Limit The Financial Capacity For Those Who Need It Most”

On Wednesday, Acting Comptroller of the Currency Michael Hsu spoke on the state of the overdraft market in the United States, highlighting the important need to provide safe and affordable short-term liquidity options for consumers within the well-regulated, well-supervised banking system. Amidst a renewed focus from policymakers on examining overdraft practices, Hsu’s observations and recommendations illustrated how competition can empower and promote financial health for American families. 

Recognizing the OCC’s intent to protect financially vulnerable Americans, Hsu commented while some banks have eliminated overdraft from their financial suite, widespread adoption of this practice may yield unintended consequences: 

“While this prevents harm, it can also limit financial capacity. For those living paycheck to paycheck, the flexibility offered by low- to no-cost overdrafts can empower them to pay their bills on time, avoid high-cost alternatives, and improve their credit profile. […] Limiting overdrafts may limit the financial capacity for those who need it most.”

Over the past five years, the overdraft market has rapidly evolved, with a growing number of banks unveiling consumer-friendly products. While commending recent efforts from banks including PNC and Capital One, Hsu also commented on the impact competition is having on the broader market:   

"Several banks decided, on their own, to reform their overdraft programs to make them more pro-consumer.[…] A race to the top for the most pro-consumer overdraft program could help make it less expensive to be poor and demonstrate to consumers that the banking system has their backs.”

As the OCC and other prudential regulators seek to promote consumer-friendly overdraft programs, Hsu noted recent reform efforts from banks, specifically, can better protect consumers seeking an emergency safety net while also rewarding institutions seeking to retain and acquire customers: 

“Promoting consumer financial health through responsible and fair products can be good business. The practices associated with these products are often consistent with sound risk management and designing and offering these products can help financial providers better serve their existing customers and acquire new ones."

New Data Reveals Rapidly Evolving Overdraft Marketplace Driven By Competition & Bank-led Innovations

Hsu’s remarks follow last week’s release of Competition Drives Overdraft Disruption, a comprehensive overview and analysis of the overdraft market in the U.S. conducted by the global data intelligence firm Curinos. The study analyzed consumer preferences and behavioral trends, prior regulatory and industry research, and also included a review of the competitive landscape of financial institutions offering short-term liquidity products and services. Notably, the study found: 

Consumers understand and value overdraft

• A majority of consumers surveyed see benefit in the product and nearly two-thirds of respondents indicated triggering an overdraft payment was a conscious choice.
• While consumers surveyed favor some proposed regulations limiting the cost of overdraft, 62% say they would reconsider support if the rules limited access to overdraft.

Overdraft use continues to decrease

• Regular overdraft use fell by 40% to 4.9% between 2010 and 2020.
• Bank-led initiatives aimed to help consumers avoid an unintended fee have dramatically reduced the number of small purchases tied to overdraft.

Competitive marketplace spurs innovation

• Since 2008, as a result of banks’ innovations, overdraft fees, per U.S. adult, have declined by 77%, or $158, and now seem to cover larger — and potentially more important — purchases.
• Consumers were more likely to open new accounts or increase their checking account activity with banks offering overdraft innovations.
• Traditional banks and fintechs offering consumer-friendly overdraft and overdraft alternatives have experienced a 40% improvement in account acquisition since 2017, compared to a decline of almost 30% for non-innovators.
• Competition will drive financial institutions to address gaps in their product suite so they can provide short-term credit alternatives to customers.

To read the full study, click HERE. 

America’s Leading Banks Are Unveiling New Products & Services To Meet Consumer Needs 

CBA long has advocated for policymakers to recognize and encourage innovation to meet the evolving needs of consumers, rather than stifling the very choice and flexibility overdraft services offer. That is exactly what America’s leading banks are working to do, introducing new products for customers to avoid overdrafts or have an overdraft product with features selected by the consumer. Some of these bank-led efforts from CBA members include: 

CBA Advocacy 

To read CBA’s statement after the Consumer Financial Protection Bureau (CFPB) released new research last week examining overdraft and non-sufficient funds (NSF) fees among leading financial institutions, click HERE. 

To watch CBA President & CEO Richard Hunt’s May interview on Fox Business correcting the record on overdraft fees and discussing the potential for increased regulation, click HERE. 

To learn more about the unintended consequences of undermining existing overdraft regulations, click HERE. 

To read CBA’s statement opposing legislation introduced in Congress in June threatening access to short-term liquidity options for hardworking families in the well-regulated, well-supervised banking industry, click HERE.