By Corey Stone
Back in early April, the Financial Health Network published a short piece of mine calling for banks and credit unions to grant universal forbearance on overdraft fees during the pandemic. I hypothesized that, as newly unemployed workers drained their savings to cover basic living expenses, many would overdraw their bank accounts and that stimulus checks, when received, would go toward paying off the accrued overdraft fees and repaying negative balances.
For the most part, however, this didn’t happen. From April through July, in fact, overdrafting fell dramatically from prior years, even among chronic overdrafters (who account for the vast majority of overdraft fees). Payday lending and loan volumes – normally another indicator of working families’ financial distress – saw a similar drop.
Data from the U.S. Financial Health Pulse® 2020 Trends Report shows what happened. The economic shutdown and mandatory lockdowns forced many people to limit discretionary spending on retail, food, and entertainment, while stimulus checks and the additional weekly $600 in unemployment benefits improved financial health in the short term. Additionally, consumers have taken advantage of early wage access and overdraft avoidance services, such as Earnin, FlexWage, Dave, and Brigit (where – full disclosure – I am an advisor).
Most importantly, the government stimulus and extra $600 per week left many families affected by sudden job loss with ample cash infusions – in some cases, with more earnings than their salaried jobs. For many, this meant that as consumer spending fell, short-term liquid savings increased.
But aggregates don’t tell the full story. We can guess that, among the chronic overdrafters who continued to be employed, some were able to lower their spending and increase their liquid assets while others weren’t. The JPMorgan Chase Institute found that, among all Chase account holders, those in the lowest income quartile were least able to reduce their spending, but were nevertheless able to increase their average liquid assets considerably – by over 40% through May. The government’s Economic Impact Payments (i.e., stimulus payments) appear to have been particularly helpful to these families. In subsequent analysis, the Institute also found big differences in spending outcomes between the employed and the newly unemployed. As of July, recipients of unemployment income had increased their spending year-over-year, while those who remained employed had reduced theirs.
The Next Chapter on Overdrafting
For millions of Americans, unemployment insurance ran out in late September and, without Congress providing further supplements, unemployed consumers are likely to begin draining their cash reserves again. Overdrafts may resume as these consumers squeeze the last funds from their accounts to get through the coming months.
That would be unfortunate, as overdrafts are poorly suited to address even short-term cash crunches. When bank balances are low and bills are due, consumers are as likely to gamble on payment timing, or guess optimistically when auto-debits will hit their accounts, as they are to overdraw their accounts on a particularly important transaction. As a result, overdrafts incurred while making nonessential transactions will drive much of the resurgence in fees.
Overdrafts are even less well-suited for consumers facing protracted income drops:
- The latest U.S. Census Pulse survey data suggests that large numbers of families are facing such drops. 32.6 million households say it has been very difficult for them to pay household expenses, and another 43.9 million say it has been somewhat difficult to do so. 1.8 million households say it is very likely they will face foreclosure in the next two months, and another 3.7 million say it is somewhat likely. Those tempted to use overdraft to forestall a foreclosure or eviction aren’t likely to recover positive balances in the absence of income supplements. The eventual loss of their homes would simply be compounded by eventual default on their bank accounts.
- The best bank response for consumers facing protracted periods of unemployment will be to suspend both overdrafts and fees. This will be hard to do, especially for the institutions that have been most dependent on overdraft income and suffered most from its recent contraction. But cutting or eliminating shadow lines and granting forbearance on overdraft and non-sufficient funds (NSF) fees will avoid a scenario in which households are taxed on their way to insolvency and then are deprived of accounts when they try to recover. In September, Huntington Bank took a step in this direction when it announced it would charge no fees for the first $50 of negative balances – the ones most often incurred by mistake. Other banks should follow Huntington’s lead.
Hopefully, the surprising volatility of overdraft revenues will accelerate institutions’ efforts to find sources of fee revenue that are less regressive and better aligned with their customers’ financial health, as outlined in my recent paper with Oliver Wyman, “Beyond Overdraft: A path to replacing unsustainable revenue.”
Meanwhile, for consumers who may become caught in the overdraft cycle, the road to financial health will be rocky, especially in an extended recession. Policy interventions, as well as bank forbearance and alternative product options, should help keep the most vulnerable customers solvent as economic uncertainty continues.
To learn more about fintech products that replicate habits and “life hacks” that many households used before the era of electronic banking, read Corey’s blog series and report on how banks and credit unions can make these “retronovations” part of their toolkits. Corey is also leading a team at the Financial Health Network examining how retronovations and other innovations can help organizations align their business models with improving customer financial health. Reach out to Corey at firstname.lastname@example.org.