2Does limited attention hinder consumers from acquiring and using readily availableinformation when making financial decisions? If yes, how does consumer attention respond toshocks and evolve over time? Answering these questions is critical for understanding how peoplemake financial tradeoffs and for designing sound public policy in retail financial markets. In thispaper we explore the role and dynamics of limited consumer attention in the payment of checking account overdraft fees, broadly defining limited attention as incomplete considerationof elements and/or prices in one’s choice set.Checking account overdraft fees are an important dimension of bank pricing, but they havebeen largely unstudied by economists. U.S. consumers spend an estimated $35 billion annuallyon fees charged for initiating transactions that would put their account balance in negativeterritory, an amount greater than what they spend on fresh fruit or large appliances (Parrish2009). Over the course of the 2000s, banks have relied increasingly heavily on overdraft fees,with such fees reaching an estimated 74% of revenue from deposit account service charges and6% of net operating revenue in recent years (Burrhouse et al. 2008).The growing importance of overdraft fees has generated considerable controversy and policyscrutiny. Consumer groups allege that overdraft fees are poorly disclosed, exploitative, anddisproportionately paid by the poor and uneducated.
This sentiment has led to lawsuits and newregulations. Recent audits and class-action lawsuits allege violations of disclosure and fair-dealing laws.
The Federal Reserve Board recently issued new rules that require banks to secureconsumer opt-in to standard overdraft coverage on debit card and ATM transactions.
Manybanks have modified their overdraft policies in the wake of these events, and some industryobservers conjecture that these changes could fundamentally alter how banks price depositaccount services.
people overdraw their accounts is crucial for optimalpolicy design, and to date, we know very little about that.To shed light on these issues we examine data from thousands of consumers’ checkingaccounts, covering up to three years of complete account activity. The data are collected by a
See, e.g.,http://www.consumerfed.org/financial-services/credit-and-debt/overdraft-loans. We discuss relationshipsbetween disclosure, other information, and attention below
On disclosure violations, see, e.g., General Accounting Office (2008). On class action suits, see, e.g.,http://www.bank-overdraft.com/ .
Seehttp://www.federalreserve.gov/consumerinfo/wyntk_overdraft.htmfor a summary geared to consumers.