Walmart’s lesson for Rohit Chopra and the CFPB
Customers pay overdraft fees when banks honor transactions that would otherwise result in insufficient funds. This can be useful for consumers who are primarily offered a short term loan to avoid denial of a transaction. This is not how Rohit Chopra sees it. On December 1, the head of the Consumer Financial Protection Bureau said banks are “hooked on operating costs which can quickly drain a family’s bank account.”
In fact, overdraft fees are not a problem for most consumers. CFPB data shows that only 9% of consumers are responsible for 80% of overdraft fees. In addition, CFPB regulations require financial institutions to obtain explicit consumer consent for overdraft protection.
Mr Chopra is wrong about overdraft fees, but he is right about one thing: âIn a fair and competitive market, banks would transparently compete on rates and fees, building customer loyalty over service and trust. . If consumers do not understand a bank’s overdraft conditions, it has no incentive to compete for their business on those conditions. Economic theory suggests that banks should want to implement and disclose attractive overdraft protection policies to gain customers. Regulators like Mr. Chopra should be aware of how diktats that increase the costs of serving a market can discourage precisely the kind of competition he says he wants to foster.
Evidence from the remittance market shows that when businesses compete to serve consumers, especially those without bank accounts or the âunbanked,â good things can happen. Walmart announced in October that its money transfer service has saved consumers $ 2.4 billion in fees since 2014.
Before Walmart entered the money transfer business, consumers could typically use MoneyGram or Western Union at a Walmart store. For transfers up to $ 900, these incumbent companies charged fees ranging from $ 4.75 to $ 76, higher fees for larger transfer amounts. When Walmart entered the market in 2014, the price of its money transfer services was up to 87% lower than the competition. MoneyGram and Western Union were forced to lower their prices. The competition benefited even those who preferred the branded offerings. Additionally, the price cuts have likely resulted in substitutions in riskier and cumbersome payment methods, such as physically transporting large amounts of money from one place to another. As the cost of transferring money increases, people increasingly rely on payday loans or high interest securities.
Competition protects unbanked people from high fees, giving them cheaper access to needed financial services. According to the Federal Deposit Insurance Corp., there were 7.1 million unbanked households in 2019, typically in low-income communities. These consumers are those who use money transfer services, the high fees of which can cause serious difficulties. Competition among banks allows those without a credit card or checking account to send money and pay their bills more cheaply. Savings are even more precious today, as inflation has peaked in 39 years, making it more difficult for everyone, but especially for financially vulnerable Americans, to purchase food, l gasoline and many other daily needs.
Competition is always the best protection against high prices, whether in the form of overdraft fees or any other financial service. And this is already happening without government help. The reports this summer that many large banks have changed their overdraft programs to make them more transparent and affordable should appeal to Mr Chopra. Regulatory mandates actually discourage competition by making disruptive entry more expensive. If the CFPB, other agencies, and Congress are serious about helping consumers of financial services, they should do what they can to promote competition.
Mr Cooper, Associate Professor, Antonin Scalia School of Law, George Mason University, served as Deputy Director of the Consumer Protection Office of the Federal Trade Commission, 2018-19.
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Published in the print edition of December 15, 2021.