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An Analysis of Bank Overdraft Fees: Pricing, Market Structure and Regulation

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  • Leslie Parrish
  • Josh Frank

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.

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  • Leslie Parrish & Josh Frank, 2011. "An Analysis of Bank Overdraft Fees: Pricing, Market Structure and Regulation," Journal of Economic Issues, Taylor & Francis Journals, vol. 45(2), pages 353-362.
    • Handle: RePEc:mes:jeciss:v:45:y:2011:i:2:p:353-362
    DOI: 10.2753/JEI0021-3624450212
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    Cited by:

    1. Michael D. Grubb, 2015. "Overconfident Consumers in the Marketplace," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 9-36, Fall.

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