Who Pays the Price? Overdraft Fee Ceilings and the Unbanked

Abstract: Would a cap on overdraft fees increase financial inclusion? Studying an event in which state-level caps were relaxed for national banks, we find that caps constrain the supply of overdraft credit and deposit accounts. Absent caps, banks charge customers more for overdraft but bounce fewer checks and reduce required minimum deposits. Low-income households are both more likely to open accounts and less likely to lose them, suggesting they prefer being banked despite higher overdraft fees. Overdraft fee caps thus hamper, rather than foster, financial inclusion.

Keywords: banks; credit; overdraft; unbanked; inclusion; checks; price ceilings; usury;

JEL Classification: D1; E43; G21; G38; G5;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2021-06-01

Number: 973

Note: Revised December 2021.