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Recurrent overdrafts: a deliberate decision by some prepaid cardholders?

Author

Listed:
  • Hayashi, Fumiko

    () (Federal Reserve Bank of Kansas City)

  • Cuddy, Emily

Abstract

Overdrafts have been an ongoing concern of policymakers, and they are one of the main issues being considered for prepaid card rules that the Consumer Financial Protection Bureau (CFPB) is currently drafting. Despite regulatory interventions and heated debate between proponents and opponents of further intervention, little research has been conducted to understand the overdraft behavior of prepaid cardholders. This paper attempts to fill that gap by analyzing a large micro-level dataset of general purpose reloadable (GPR) prepaid cardholders. We find that a small percentage of GPR prepaid cardholders regularly make overdraft transactions and incur overdraft fees, but they tend to spend and load more funds on their card as well as use their card for a longer period of time than do cardholders who do not make overdraft transactions. Our results suggest that some cardholders may be making a deliberate decision to overdraw their account and pay overdraft fees.

Suggested Citation

  • Hayashi, Fumiko & Cuddy, Emily, 2014. "Recurrent overdrafts: a deliberate decision by some prepaid cardholders?," Research Working Paper RWP 14-8, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp14-08
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    File URL: http://www.kansascityfed.org/publicat/reswkpap/pdf/rwp14-08.pdf
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    References listed on IDEAS

    as
    1. Victor Stango & Jonathan Zinman, 2014. "Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 990-1030.
    2. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
    3. Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, March.
    4. Hayashi, Fumiko & Cuddy, Emily, 2014. "General purpose reloadable prepaid cards : penetration, use, fees and fraud risks," Research Working Paper RWP 14-1, Federal Reserve Bank of Kansas City.
    5. Stephanie M. Wilshusen & Robert M. Hunt & James van Opstal & Rachel Schneider, 2012. "Consumers’ use of prepaid cards: a transaction-based analysis," Consumer Finance Institute discussion papers 12-02, Federal Reserve Bank of Philadelphia.
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    Cited by:

    1. Hayashi, Fumiko & Hanson, Josh & Maniff, Jesse Leigh, 2015. "Driver of choice? the cost of financial products for unbanked consumers," Research Working Paper RWP 15-15, Federal Reserve Bank of Kansas City.

    More about this item

    Keywords

    Overdrafts; General purpose reloadable prepaid cards; Unbanked and underbanked;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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