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Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees

Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees

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The authors explore dynamics of limited attention in the $35 billion market for checking overdrafts, using survey content as shocks to the salience of overdraft fees. Conditional on selection into surveys, individuals who face overdraft-related questions are less likely to incur a fee in the survey month. Taking multiple overdraft surveys builds a "stock" of attention that reduces overdrafts for up to two years. The effects are significant among consumers with lower education and financial literacy. Consumers avoid overdrafts not by increasing balances but by making fewer debit transactions and cancelling automatic recurring withdrawals. The results raise new questions about consumer financial protection policy.
The authors explore dynamics of limited attention in the $35 billion market for checking overdrafts, using survey content as shocks to the salience of overdraft fees. Conditional on selection into surveys, individuals who face overdraft-related questions are less likely to incur a fee in the survey month. Taking multiple overdraft surveys builds a "stock" of attention that reduces overdrafts for up to two years. The effects are significant among consumers with lower education and financial literacy. Consumers avoid overdrafts not by increasing balances but by making fewer debit transactions and cancelling automatic recurring withdrawals. The results raise new questions about consumer financial protection policy.

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Published by: Federal Reserve Bank of Philadelphia on Apr 22, 2011
Copyright:Attribution Non-commercial

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05/25/2012

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WORKING PAPER NO. 11-17LIMITED AND VARYING CONSUMER ATTENTION:EVIDENCE FROM SHOCKS TO THE SALIENCE OFBANK OVERDRAFT FEES
Victor StangoUniversity of California, DavisJonathan ZinmanDartmouth CollegeandVisiting Scholar, Federal Reserve Bank of PhiladelphiaApril 2011
 
1Limited and Varying Consumer Attention:Evidence from Shocks to the Salience of Bank Overdraft Fees
*
 Victor StangoGraduate School of ManagementUniversity of California, DavisJonathan ZinmanDepartment of EconomicsDartmouth CollegeApril 2011ABSTRACTWe explore dynamics of limited attention in the $35 billion market for checkingoverdrafts, using survey content as shocks to the salience of overdraft fees. Conditionalon selection into surveys, individuals who face overdraft-related questions are less likelyto incur a fee in the survey month. Taking multiple overdraft surveys builds a “stock” of attention that reduces overdrafts for up to two years. The effects are significant amongconsumers with lower education and financial literacy. Consumers avoid overdrafts notby increasing balances but by making fewer debit transactions and cancelling automaticrecurring withdrawals. The results raise new questions about consumer financialprotection policy.
*
 vstango@ucdavis.edu, jzinman@dartmouth.edu. Thanks to the Filene Research Institute, the Rockefeller Center at Dartmouth College, and UC-Davis for funding. Thanks to Iwan Barankay, Wilko Bolt, Brianna Cardiff, StefanoDellaVigna, Bob Hunt, Ulrike Malmendier, Paul Oyer, Karen Pence, Julio Rotemberg, Marc Rysman, Scott Schuh,Nick Souleles, and conference/seminar participants at the 2011 AEA meetings, the FTC/Northwestern MicroConference, Kellogg, NBER Behavioral Economics, NBER Law and Economics, RAND, UC-Boulder, UCLA, andthe Federal Reserve Banks of Boston, Chicago, New York, and Philadelphia for helpful comments.
 
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.
1
This sentiment has led to lawsuits and newregulations. Recent audits and class-action lawsuits allege violations of disclosure and fair-dealing laws.
2
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.
3
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.
4
Understanding
why
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
1
See, e.g.,http://www.consumerfed.org/financial-services/credit-and-debt/overdraft-loans. We discuss relationshipsbetween disclosure, other information, and attention below
2
On disclosure violations, see, e.g., General Accounting Office (2008). On class action suits, see, e.g.,http://www.bank-overdraft.com/ .
3
Seehttp://www.federalreserve.gov/consumerinfo/wyntk_overdraft.htmfor a summary geared to consumers.
4
See, e.g.,http://online.wsj.com/article/SB10001424052748703513604575311093932315142.html.

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