Earned Wage Access & the American Overdraft Fee Crisis

DailyPay, Inc.
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You know we have a serious economic justice problem in this country when the poorest Americans are paying $8 billion in overdraft fees in $35 increments to the nation’s largest banks. But that’s exactly what happened in 2020 and as the CFPB found in their recent work on this issue, as a result of the COVID-19 pandemic, that staggering amount of money was actually a decrease from 2019. Unfortunately, the decrease in Americans paying these overdraft fees is not the trend and overdraft fees are predicted to hit their highest levels ever in 2021.

Despite the best efforts of consumer protection advocates and similarly aligned elected officials, overdraft fees charged in the United States have steadily risen since the FDIC began collecting this data in 2015 from banks that have more than $1 billion in assets. Last year, 2020, was the only exception when banks reported a 24% decrease in revenue from these fees after consumers curbed spending, public assistance reached record highs, and some fees were waived because of the pandemic. The total revenue banks earned from overdraft fees according to the Center for Responsible Lending is especially troubling since approximately 95% of that total is collected from financially vulnerable people each year.

Unfortunately, the revenue from overdrafts are going up so much in 2021 that the totals are expected to top 2019’s historic high of $11.68 billion. The CFPB’s recently released 2019 total of $15.47B includes fees charged by credit unions and smaller banks as well as the larger ones required to report this information to the FDIC. Outside of notable exceptions like PNC Bank and Capital One, both of which have moved recently to reform their overdraft programs, most banks are unmoved to make any real changes.

Of course, the banking industry has almost uniformly adopted one notable consumer protection of early access to direct deposit. But that’s really it - and it’s not enough, because getting paid 1 or 2 days early doesn’t help you the other 14 or 13 days of the pay cycle. This is why neobanks are growing in popularity with important perks like $200 overdraft fee buffers and why, most importantly, innovative products like employer-integrated earned wage access, oftentimes called on-demand payroll, which has been demonstrated to stop reliance on overdrafting, is so important.

Additional state and federal government actors have of course been trying to solve this crisis with ideas that would directly address the crisis. Congresswoman Carolyn Maloney (D-NY)’s Overdraft Protection Act is one such example with a comprehensive approach that deserves attention. The Office of the Comptroller of the Currency (OCC) also recently discussed legislative recommendations in a speech last month that would be similarly effective. But by design, legislative bodies are deliberative and require compromise to get things done. That’s usually a good thing but the national overdraft crisis just keeps getting worse. People need solutions now and it’s why, in addition to CFPB scrutiny, we need to be encouraging financial innovations that can replace overdraft fees to grow as broadly as possible with appropriate safeguards, so that everyone has access to products that reduce fees for frequent over-drafters. Together with close CFPB attention and enforcement when necessary, we can hope to finally reverse the overdraft trend, and not just temporarily because of a once in a 100 year pandemic.

Fortunately, new innovations like the employer-integrated earned wage access industry, is increasingly becoming a real part of the solution. Recently, DailyPay commissioned a study with the Aite-Novarica Group, an independent research and advisory firm specializing in consumer protection in the technology and financial services industry. Aite-Novarica studied more than 1,000 DailyPay users and after their work, they conservatively estimated potential savings of $660 annually or more for those that previously regularly overdrew their bank accounts. According to the research, 97% of these users report they now either rarely or never overdraw their accounts (79%), or they say their occurrences of overdrafting has lessened (18%). Three-quarters of respondents attributed this relief to the use of the on-demand payroll platform.

This is encouraging data but we know there is no silver bullet and no one innovation, industry, law, or federal agency that will solve this problem. But together with the CFPB’s help, the OCC’s partnership, and other reform efforts, the fintech industry has an exciting opportunity to develop new strategies to combat this crisis. Unfortunately, new COVID strains, increased rates, and economic uncertainty have a larger economic impact on financially vulnerable Americans, so we need to make sure change is coming as quickly and responsibly as possible. We look forward to standing with all like-minded allies in this battle against the billions of dollars charged to poor and vulnerable Americans in overdraft fees each year, and hope other industry partners will be joining us.

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