As state and federal aid programs wind down, millions of economically vulnerable Americans face an uncertain financial future. For example, the Consumer Financial Protection Bureau (CFPB) warns that renters—which make up 30% of the U.S. population— are at risk of “falling off an economic cliff.” This is partly because of a close correlation between their financial stability and changes in stimulus payments and unemployment benefits. We need to fix overdrafts.
With past due bills piling up and income dwindling, many Americans may no longer be able to afford traditional banking services—or worse, their negative payment histories could put them on the banking deny list permanently. In 2019, 6% of U.S. households, or 14.1 million adults, were unbanked, and rates were on the decline. But this wasn’t the case in vulnerable communities, where 19% of households making less than $30,000 annually were unbanked (compared to 2.4% of households making more than $30,000 annually). On top of that, 18.7% of U.S. households were underbanked. Importantly, these 2019 figures don’t take the effects of the pandemic into account.
As more households stare down the proverbial economic cliff, we could see a considerable spike in the population of unbanked and underbanked Americans. Seeing as the average financially underserved household spends 9.5% of its annual income on fees alone, this could soon turn into a financial free fall.
This is partly why regulators are so focused on consumer protection—and why non-sufficient funds (NSF) and overdraft policies are such a target. It’s these policies that often result in people being kicked out of mainstream banking. And it all comes down to the consumer’s lack of visibility and control in the NSF and overdraft process.
Transparency and control can keep people in banking Regardless of fees, when a consumer faces NSF, it’s the financial institutions that decide the order in which transactions are processed, and which items are paid or declined. That means that even if overdraft fees are completely eliminated, consumers may still face a ripple effect of fees and bad credit. For example, if their clothing purchase goes through, but their water bill is returned, they will still face a late fee from the utility company and an NSF charge. Over time this could lead to more people becoming underbanked or unbankable, the exact opposite of what regulators are looking to achieve.
Since overdraft fees took the regulatory spotlight in May’s congressional hearings, the nation’s largest banks, and credit unions have rolled out a slew of new products and services that enable their customers to avoid overdraft fees. These range from proprietary solutions to fee reductions and eliminations. But these overdraft programs are still missing the market by not adding transparency and control to the process. While customers may opt-in to overdraft services when they open their account, they don’t have any say when they face an account shortage, and fees automatically begin to process.
Only financial inclusion can lead to positive, long-lasting change There are also stipulations on these new “no fee” overdraft benefits. Some require monthly deposit minimums. Others require a linked checking or savings account. In fact, most institutions still maintain the same overdraft policies for the majority of their account types—especially those that are affordable for average consumers.
This is where the issue of inclusion comes in. The best way for the industry to fully address the problem is to ensure an accessible solution that provides transparency and control available to everyone. Multiple different offerings from separate institutions could confuse consumers and create unequal access.
It’s time to give consumers the option to rectify their insufficient balance before any of their funds are returned. By enabling them to review transactions and adjust items that are declined and returned, financial institutions can help minimize the damaging ripple effect of declined payments and truly take up the regulatory cause of consumer empowerment.
