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Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion

Jennifer L. Dlugosz, Brian Melzer and Donald Morgan
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Jennifer L. Dlugosz: https://www.federalreserve.gov/econres/jennifer-l-dlugosz.htm

No 20210630b, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The 25 percent of low-income Americans without a checking account operate in a separate but unequal financial world. Instead of paying for things with cheap, convenient debit cards and checks, they get by with “fringe” payment providers like check cashers, money transfer, and other alternatives. Costly overdrafts rank high among reasons why households “bounce out” of the banking system and some observers have advocated capping overdraft fees to promote inclusion. Our recent paper finds unintended (if predictable) effects of overdraft fee caps. Studying a case where fee caps were selectively relaxed for some banks, we find higher fees at the unbound banks, but also increased overdraft credit supply, lower bounced check rates, and more low-income households with checking accounts. That said, we recognize that overdraft credit is expensive, sometimes more than even payday loans. In lieu of caps, we see increased overdraft credit competition and transparency as alternative paths to cheaper deposit accounts and increased inclusion.

Keywords: overdrafts; unbanked; inclusion; price ceilings; bounced checks (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2021-06-30
New Economics Papers: this item is included in nep-ban, nep-fle and nep-pay
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