Fintech companies, meanwhile, are popping up with mobile phone money management apps to help millennials avoid overdraft fees. One such company is named Dave—which has Dallas Mavericks owner Mark Cuban as lead investor—and tracks, analyzes, and predicts users’ balances and lets them borrow up to $75, interest-free, until the next payday to prevent an overdraft fee.
The company sees helping with overdrafts as a way into a bigger banking relationship with its users, who tend to be between 18 and 34.
A U.K. startup called Chip is a chatbot also focused on helping British millennial users avoid overdraft charges through its savings algorithm. The company has plans for a feature called “Smart Credit” that will automatically provide a small loan (not for free but less than an overdraft would cost) when it sees a customer is about to go into overdraft.
Many consumers agree to overdraft services without being entirely clear what they’re signing up for—or just forgetting they agreed to it. The 2014 Pew report found that 52 percent of people who overdrew their account and got a fee didn’t recall opting into the coverage. The benefit, of course, is that the bill your paying gets paid or the purchase you’re making rings through. The cost, of course, is the fee.
Overdraft fees on checking accounts have risen since the recession and are the leading fee category in all non-interest income, said Michael Moebs of Moebs Services Inc., an economic research firm. He thinks fees could produce $40 billion in annual revenue across banks, thrifts, and credit unions by 2020. For the first quarter of 2017, bank and credit union revenue from overdraft fees, including those on bounced checks, was $8.4 billion, which translates into $33.6 billion on an annual basis, he said.
Pew has urged regulators to make changes including enabling “banks and credit unions to offer affordable small-dollar loans in place of expensive overdraft penalty programs” and to “make overdraft penalty fees reasonable and proportional either to the financial institution’s costs in providing the overdraft loan or to the overdraft amount.”
Virginia O’Neill, senior vice president of the American Bankers Association, said in a statement that the lobbying group will work "with the bureau to test the proposed new disclosures to make sure they improve consumer understanding.”
Don’t expect much regulatory action out of the CFPB on the overdraft front soon, though. In a prepared statement introducing the new report, CFPB director Richard Cordray said that, “We are not proposing any regulatory amendments at this time, though we are considering new overdraft regulations, and currently we are in the ‘pre-rule stage’ with no timing stated for when a rule may be proposed.”
If Cordray is to lead the charge, he has about a year—his term expires in July, 2018, though at least one adviser to President Donald Trump has suggested an earlier departure.
This article was provided by Bloomberg News.