An Analysis of Bank Overdraft Fees: Pricing, Market Structure and Regulation
- 1 June 2011
- journal article
- Published by Informa UK Limited in Journal of Economic Issues
- Vol. 45 (2), 353-362
- https://doi.org/10.2753/jei0021-3624450212
Abstract
Overdraft fees are charged when financial institutions cover a customer's transaction when their checking account lacks sufficient funds. Despite being defined as an extension of credit, overdraft fees are not covered by Truth in Lending protections. We hypothesize that this loophole emboldened financial institutions to create increasingly aggressive fee-based overdraft programs that rapidly evolved into a key driver of total fee income. We estimate the total cost to consumers of overdraft fees, and find that almost half of this income is generated by debit card transactions in which customers pay a fee averaging $2 for every $1 in credit extended.Keywords
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