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Study sheds light on account overdraft effects, alternatives for banks, customers

December 4, 2018

Consumers tend to disregard potential consequences when they spend or withdraw from their checking account, due to impulsive spending habits. And because of high monitoring fees, they might not be able to closely track their balance, as some banks charge for statements or balance checks. 

The result can be an overdrawn account, according to "Analyzing Bank Overdraft Fees with Big Data," a study by researchers from New York University and Carnegie Mellon University to be published in the December edition of the INFORMS journal of Marketing Science.

The study found that when consumers incur what they see as unreasonably high overdraft fees, they tend to become dissatisfied and leave their bank.

The researchers make a case for the use of data and predictive analytics to better address the problem. 

Policy simulations show that alternative pricing strategies can help increase bank revenue while improving consumer welfare. 

These strategies include fixed bill schedules and overdraft waiver programs that can be applied to individual consumers who exhibit certain overdrafting behaviors.

"A potential solution for both consumers and banks is to leverage financial transaction data to manage overdrafting and offer new services that use the financial transaction data," the authors said. "Financial institutions store massive amounts of information about consumers, which is a byproduct of the transactions. In this research, we show how this information can be harnessed to predict consumers’ overdrafting behavior."

The study used anonymized data from a large U.S. bank, and included more than 500,000 accounts with a history of up to 450 days.