For years, the Federal Deposit Insurance Corp., has described overdraft protection programs as services that prey solely on low-income Americans who are struggling financially. As of late, the Consumer Financial Protection Bureau has revived this falsehood, and used it as a reason to launch investigations into bank overdraft policies. However, another study has proven these claims to be untrue, and revealed that income and overdrafts are not linked.
The results of a study, conducted by the George Mason University Mercatus Center, demonstrate that overdrafts, by their very nature, appeal to financially stable Americans. In order to participate in an overdraft program, consumers must be enrolled in a checking account, therefore eliminating those underbanked individuals who typically rely on check-cashing services and alternative financial products.
More importantly, the numbers speak for themselves. Seventy-one percent of free-checking customers who carried low average balances below $250 did not overdraw their accounts between October 2009 and 2010.
But the fact agencies should pay attention to, is that this group of account holders with low balances and zero overdrafts was higher than the number of all combined accounts that did not overdraw their available funds. These figures signify that those with higher checking account balances overdrew their accounts more so than those with a limited balance. In short, this means that income is less of a factor than smart money management.
Adhering to sound and responsible overdraft policies is important for both the consumers that rely on them and the banks that service them. The first step in weeding out poorly devised programs is to recognize and dispel common myths about this valuable service.