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Price-increasing competition: the curious case of overdraft versus deferred deposit credit

We find that banks charge more for overdraft credit when depositors have access to a potential substitute: deferred deposit ("payday") credit. We attribute this rise in prices partly to adverse selection created by banks' practice of charging a flat fee regardless of the overdraft amount--pricing that favors depositors prone to large overdrafts. When deferred deposit credit priced per dollar borrowed is available, depositors prone to small overdrafts switch to that option. That selection works against banks; large overdrafts cost more to supply and, if depositors default, banks lose more, ...
Staff Reports , Paper 391

Journal Article
Large-dollar payment flows from New York

Quarterly Review , Volume 12 , Issue Win

Working Paper
Recurrent overdrafts: a deliberate decision by some prepaid cardholders?

Overdrafts have been an ongoing concern of policymakers, and they are one of the main issues being considered for prepaid card rules that the Consumer Financial Protection Bureau (CFPB) is currently drafting. Despite regulatory interventions and heated debate between proponents and opponents of further intervention, little research has been conducted to understand the overdraft behavior of prepaid cardholders. This paper attempts to fill that gap by analyzing a large micro-level dataset of general purpose reloadable (GPR) prepaid cardholders. We find that a small percentage of GPR prepaid ...
Research Working Paper , Paper RWP 14-8

Journal Article
Billion-dollar overdrafts: a payments risk challenge

Special issue on payments system risk
Financial Industry Perspectives

Discussion Paper
Consumer testing informs policy: overdraft regulation as a case study

In November 2009, the Board of Governors of the Federal Reserve System issued regulations that protect consumers from being charged certain fees when, under a discretionary overdraft service, financial institutions pay transactions from a deposit account that contains insufficient funds. Under the regulations, consumers must receive notices that explain any discretionary overdraft services offered to them by their bank. In addition, consumers may not be charged overdraft fees for ATM or one-time debit transactions unless they have opted in to this service. During the rulemaking process, the ...
Consumer Finance Institute discussion papers , Paper 10-03

Working Paper
Limited and varying consumer attention: evidence from shocks to the salience of bank overdraft fees

The authors explore dynamics of limited attention in the $35 billion market for checking overdrafts, using survey content as shocks to the salience of overdraft fees. Conditional on selection into surveys, individuals who face overdraft-related questions are less likely to incur a fee in the survey month. Taking multiple overdraft surveys builds a "stock" of attention that reduces overdrafts for up to two years. The effects are significant among consumers with lower education and financial literacy. Consumers avoid overdrafts not by increasing balances but by making fewer debit ...
Working Papers , Paper 11-17

Journal Article
Intraday credit: risk, value, and pricing

An abstract for this article is not available
Economic Review , Volume 73 , Issue Jan , Pages 3-14

Journal Article
SIC: Switzerland's new electronic interbank payment system

It is an article of faith among American bankers and their regulators that some daylight overdrafts are necessary to the efficient functioning of large-dollar wire transfer systems. But the Swiss have injected an element of doubt by developing a system that does away with daylight overdrafts. Their new system processes a payment only if sufficient clearing funds are on deposit in the sending banks reserve account. If sufficient funds are not available, the payment is held in a queue until covering funds have arrived. Vital and Mengle describe the first eighteen months of the systems operation.
Economic Review , Volume 74 , Issue Nov , Pages 12-27

Journal Article
Fed announces changes in measuring and pricing daylight overdrafts

Financial Update , Issue Jan , Pages 1-3

Journal Article
New rules aim to clarify overdraft information

New amendments to Regulation DD address how banks inform their customers about bounced-check protection services.
Financial Update , Volume 18 , Issue Q 3


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