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Does an Overdraft Facility Influence the Customer Costs of Using a Personal Current Account?

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  • John K. Ashton
  • Andros Gregoriou

Abstract

This study examines whether personal current accounts offering an overdraft facility cost customers less to use than accounts not offering this service. This analysis uses a UK data set of 222 personal current accounts, recorded monthly between 1995 and 2011, in combination with interest rates from 1200 instant-access deposit accounts offered contemporaneously by the same firms. Our results indicate personal current accounts offering overdraft facilities have higher deposit and payment service costs than accounts not offering this service. The finding is robust to varying service attributes. This result is inconsistent with suggestions that overdraft users have been cross-subsidising other personal current account users as widely reported in theoretical and policy literatures. It is concluded that implicit and inertia costs of personal current account use may be more influential than previously reported in the pricing of these accounts.

Suggested Citation

  • John K. Ashton & Andros Gregoriou, 2017. "Does an Overdraft Facility Influence the Customer Costs of Using a Personal Current Account?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 24(1), pages 1-26, January.
    • Handle: RePEc:taf:ijecbs:v:24:y:2017:i:1:p:1-26
    DOI: 10.1080/13571516.2016.1222990
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    References listed on IDEAS

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    1. Céline Gondat-Larralde & Erlend Nier, 2006. "Switching costs in the market for personal current accounts: some evidence for the United Kingdom," Bank of England working papers 292, Bank of England.
    2. Schmiedel, Heiko & Kostova, Gergana & Ruttenberg, Wiebe, 2012. "The social and private costs of retail payment instruments: a European perspective," Occasional Paper Series 137, European Central Bank.
    3. repec:spr:pharme:v:26:y:2008:i:2:p:91-98 is not listed on IDEAS
    4. Cambpbell, John Y. & Jackson, Howell Edmunds & Madrian, Brigitte & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Scholarly Articles 4450128, Harvard Kennedy School of Government.
    5. Schmiedel, Heiko & Kostova, Gergana & Ruttenberg, Wiebe, 2012. "The social and private costs of retail payment instruments: a European perspective," Occasional Paper Series 137, European Central Bank.
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