Analyzing Bank Overdraft Fees with Big Data | Marketing Science

Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees

Abstract. We explore dynamics of limited attention in the $35 billion market for checking overdrafts, using survey content as shocks to the salience of ove

Unshrouding: Evidence from Bank Overdrafts in Turkey

ABSTRACT Lower prices produce higher demand… or do they? A bank's direct marketing to holders of “free” checking accounts shows that a large discount on 60% APR overdrafts reduces overdraft usage, especially when bundled with a discount on debit card or autodebit transactions. In contrast, messages mentioning overdraft availability without mentioning price increase usage. Neither change persists long after the messages stop. These results do not square easily with classical models of consumer choice and firm competition. Instead, they support behavioral models where consumers underestimate and are inattentive to overdraft costs, and firms respond by shrouding overdraft prices in equilibrium.

Time to Act: A Field Experiment on Overdraft Alerts

Despite the growth of digital banking and the rapidly expanding offering of money management applications, a substantial proportion of banking customers still i

Do Customers Learn from Experience? Evidence from Retail Banking

We study customers' adoption and subsequent switching decisions with regard to a menu of three-part tariff plans offered by a commercial bank. Using a rich panel data set covering 70,510 fee-based checking accounts over 30 months, before and after the introduction of the plans, we find that most customers adopt non-cost-minimizing plans, preferring plans with large monthly allowances and high fixed payments. Furthermore, after adoption, customers who exceed their allowances and consequently pay overage fees are more likely to switch to plans with larger allowances than customers who do not experience such fees. Notably, after switching, these overage-paying customers pay higher monthly payments than before. In contrast, switching customers who did not pay overage payments before switching pay less after switching. Our findings, unlike those of previous research on experience-based learning, suggest that the behavior of experienced customers does not converge to the predictions of neoclassical models. We propose that “overage aversion,” which is closely related to loss aversion and mental accounting, is the most plausible explanation for our findings. This paper was accepted by John List, behavioral economics.

Using AI and Behavioral Finance to Cope with Limited Attention and Reduce Overdraft Fees

<p><span>We test how effective a human-algorithm interaction is at stopping users from overdrawing their bank accounts. We use a randomized field experiment and

Sending Out an SMS: Automatic Enrollment Experiments for Overdraft Alerts

ABSTRACT At‐scale field experiments at major U.K. banks show that automatic enrollment into “just‐in‐time” text alerts reduces unarranged overdraft and unpaid item charges 17% to 19% and arranged overdraft charges 4% to 8%, implying annual market‐wide savings of £170 million to £240 million. Incremental benefits from “early‐warning” alerts are statistically insignificant, although economically significant effects are not ruled out. Prior to the experiments, over half of overdrafts could have been avoided by using lower‐cost liquidity available in savings and credit card accounts. Alerts help consumers achieve less than half of these potential savings.

Timing to the Statement: Understanding Fluctuations in Consumer Credit Use

We show that consumers spend 15% more per day in the first week following the receipt of a credit card statement than in the days just prior to the statement. This increase in spending includes both an increase in the likelihood that they use the credit card in the first weeks following their statement and an increase in transaction amount on days they use the credit card. In contrast to the effect on credit card spending, debit card spending is unaffected by credit card statement issuance, suggesting that consumers are not simply switching among modes of payment. Our estimates are based on exogenous variation from bank-assigned statement dates. We propose and test several alternative explanations to this spending puzzle: optimization of the free float, salience effect of the credit card statement, mental accounting, liquidity constraints, and automatic payments. We find that the consumers most apt to spend early in the credit card cycle tend to be those who do not revolve balances and are not close to their credit limit. Thus, this paper documents a puzzle with mixed support for several alternative explanations. This paper was accepted by David Simchi-Levi, finance.

How Do Consumers Avoid Penalty Fees? Evidence from Credit Cards

Using data from multiple card issuers, we show that the most common penalty fee type incurred by credit card holders, late payment fees, declines sharply over the first few months of card life. This phenomenon is wholly due to some consumers adopting automatic payments after a late payment event, thereby insuring themselves against future late payment fees. Nonadopters, who remain on manual-only payments, experience an unchanged high likelihood of future fees, despite exhibiting ample levels of available liquidity. Our results show that heterogeneity in adopting account management features of financial products, such as automatic payments, is important for understanding who avoids financial mistakes. This paper was accepted by Gustavo Manso, finance.

Side Effects of Nudging: Evidence from a Randomized Intervention in the Credit Card Market

Abstract This paper studies the direct and indirect effects of nudging, by means of a field experiment with a financial management platform in Brazil. Reminders for upcoming credit card payments reduced credit card late-payment fees by 14%, but increased overdraft fees in checking accounts by 9%. The unintended effect is concentrated in users with a history of overdraft use. These users experienced a net increase of 5% in total fees, while the rest experienced savings of 15%. The results provide clear insights for nudge design: like any policy action, nudges can have side effects, and one size may not fit all.

The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas

Using transaction data from a sample of 1.8 million credit card accounts, we provide the first field test of a major prediction of Prelec and Loewenstein’s theory of mental accounting: that consumers will pay off expenditure on transient forms of consumption more quickly than expenditure on durables. According to the theory, this is because the pain of paying can be offset by the future anticipated pleasure of consumption only when money is spent on consumption that endures over time. Consistent with this prediction, we found that repayment of debt incurred for nondurable goods is an absolute 10% more likely than repayment of debt incurred for durable goods. The strength of this relationship is comparable to an increment in 15 percentage points in the credit card annualized percentage rate. Our results have not only managerial implications for the structuring of financial transactions (e.g., that credit card customers should be given the option of paying off specific purchases) but also more general implications for exploiting variations in the pain of paying in incentive schemes aimed at customers and employees. This paper was accepted by Yan Chen, behavioral economics.

Disclosing the costs of co-holding liquid assets and high-interest debt has limited impact on behavior

Abstract Why do consumers simultaneously maintain low-yield liquid assets and high-interest revolving debt? This behavior, known as ``co-holding,'' affects 23\% of credit card users in our sample from a major international bank and costs the typical co-holder hundreds of dollars annually in unnecessary interest charges. Our analysis of 38 months of detailed banking records reveals that co-holding is remarkably persistent, with typical co-holders maintaining this behavior for most months observed. Our analysis also reveals that co-holding is not a static financial position: co-holders regularly deposit and withdraw from asset accounts while simultaneously making new credit card purchases. To test whether co-holding could be addressed through information disclosure, we conducted a large-scale field experiment (n = 125,328), providing clear information about co-holding behavior and its costs. Customers received targeted messages through their bank's mobile app, where they could easily transfer money from assets to pay down debt. Despite sufficient power to detect economically small effects, we found no meaningful changes in debt repayment amount, though customers did respond in other ways---making more frequent repayments and paying above required minimums. These results challenge explanations based on limited attention or information gaps and suggest that simple information disclosure, even when carefully designed and delivered through trusted channels, may not effectively address costly financial behaviors.

The Impact of Payment Frequency on Consumer Spending and Subjective Wealth Perceptions

Abstract Payment frequency is a fundamental yet underexplored feature of consumers’ finances. As higher payment frequencies are becoming more prevalent, consumers are receiving more frequent yet smaller paychecks. An analysis of income and expenditure data of over 30,000 consumers from a financial services provider demonstrates a naturally occurring relationship between higher payment frequencies and increased spending. A series of lab studies support this finding, providing causal evidence that higher (vs. lower) payment frequencies increase spending. The effect of payment frequency on spending is driven by changes in consumers’ subjective wealth perceptions. Specifically, higher payment frequencies reduce consumers’ uncertainty in predicting whether they will have enough resources throughout a period, increasing their subjective wealth perceptions. As such, situational factors that reduce prediction uncertainty for those paid less frequently (e.g., the timing of consumers’ expenses, income levels) moderate the impact of payment frequency. The effects of payment frequency on subjective wealth and spending can occur even when objective wealth favors those with lower payment frequencies. More broadly, the current work underscores a need to understand how timing variations in consumers’ income impact their perceptions, behaviors, and general well-being.

The Exception Is the Rule: Underestimating and Overspending on Exceptional Expenses

Abstract Purchases fall along a continuum from ordinary (common or frequent) to exceptional (unusual or infrequent), with many of the largest expenses (e.g., electronics, celebrations) being the most exceptional. Across seven studies, we show that, while people are fairly adept at budgeting and predicting how much they will spend on ordinary items, they both underestimate their spending on exceptional purchases overall and overspend on each individual purchase. Based on the principles of mental accounting and choice bracketing, we show that this discrepancy arises in part because consumers categorize exceptional expenses too narrowly, construing each as a unique occurrence and consequently overspending across a series of discretely exceptional expenses. We conclude by proposing an intervention that diminishes this tendency by helping consumers consider their spending on exceptional items as part of a larger set of purchases.

Sending Out an SMS: The Impact of Automatically Enrolling Consumers Into Overdraft Alerts

Incidental charges incurred by UK consumers on their Personal Current Account (PCA) are steep, especially for small amounts of unplanned borrowing and unpaid it

What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs

(May 2009)

The Effects of Prior Spending on Future Spending Decisions: The Role of Acquisition Liabilities and Payments

Research in mental accounting shows that prior spending influences a consumer's decision to make a new spending decision (Heath and Soll 1996, Soman 2001). In particular, greater spending in a particular category reduces the likelihood of further spending in that category. In the present research, we decompose “spending” into two distinct episodes—the acquisition liability episode during which a purchase is made accompanied by a commitment to pay (e.g., using a credit card) and the payment episode during which the consumer's wealth actually gets depleted (e.g., paying the credit card bill). Using a controlled laboratory experiment and real world data from a group of consumers, we replicate earlier findings that prior spending influences a pending spending decision, but also show that the location of both the acquisition liability episode and the payment episode play a role. Our results contribute to an understanding of the dynamic mental accounting of acquisition liability and actual outflows.