Helping the Credit-Marginalized Conquer Overdraft Fees With Digital Banking

The days of harmful overdraft fees are slowly disappearing – a long-sought victory for consumers everywhere! That’s right, financial institutions are increasingly referring their members and customers to funding alternatives like healthier, growth-oriented small-dollar loans or installment loan programs, according to The New York Times earlier this year.

“The changes over the past two years are both large and positive for consumers,” according to Pew Charitable Trust’s Alex Horowitz. This overdue development provides a sense of financial relief for millions of consumers, particularly for low-income and credit-marginalized communities.

While fees are diminishing, there is a consistent population paying up, according to Meghyn Greene, senior director of policy and research at the Financial Health Network (FHN), who noted banks still managed to collect $10 billion in overdraft fees in 2022, and largely from “people who are struggling financially.”

Why the Credit-Marginalized Still ‘Depend’ on Overdrafts

According to a new study by PYMNTS, nearly half of the consumers with marginalized credit had lack of sufficient funds in their accounts for a purchase within the last year. In fact, 20% of the group claimed to use overdrafts or had a purchase transaction declined.

“People who live paycheck to paycheck, millennials and the credit-marginalized tend to use overdrafts the most – and, at the same time, are the most vulnerable consumer groups,” the study found.

Those vulnerable households, which are inordinately Black and Latino, are more likely to report being charged more than 10 overdraft fees per year. Such frequent overdraft recipients are far more likely to admit their last overdraft charge was committed on purpose; in other words, they knew they didn’t have the appropriate funds to cover the payment, but they went through with the transaction anyway.

The tragedy is that many of these consumers are under intense financial strain from other financial pressures and requirements. “They have very few other options” to obtain funds, Greene clarified.

Findings from FHN’s Spend Report earlier this year concluded that total interest and fees from credit card balances increased by more than 20% in 2022 to an estimated $113.1 billion due to higher card balances and higher interest rates. Greene emphasized that nearly half of financially-vulnerable card holders have more than $5,000 in credit card debt, which means those higher rates are compounding the financial challenges on those who are already struggling.

Any single one of those compounding hardships affecting the financially vulnerable, of course, will affect other financial aspects of their lives. The PYMTS study reported that roughly 94% of consumers who used overdrafts to cover charges of more than $400 also reported dealing with other economic difficulties, like paying monthly bills, for instance. That, paired with the 77% of consumers who used overdrafts to cover transactions up to $100.

Access for the Credit-Marginalized Is There for the Taking

There is virtually no limit to the advantages that come with implementing digital banking resources or fintech tools to relieve credit-marginalized individuals, households, or entire communities representing a quarter of the U.S. population.

The benefits are many. For the consumer, they offer near-unlimited services (e.g., payments, savings, insurance and more), efficiency, affordability and the reduction of transaction costs, and solve for geographical distance. In addition, these tools increase transparency, loyalty and trust in mainstream financial systems and the institutions that offer them. Add in the cooperative-facing convenience of today’s digital fintech platforms that perform all the work needed, and they open up credit union staff to attend to other daily tasks and duties. Think of it: A revenue-generating program working 24/7/365 to provide a necessary product and requiring no regular attending manager.

As much as any product or service advantage, the foundational digital small-dollar loan platform remains a powerful, long-term tool in rectifying and building back your marginalized members’ financial lives. By taking out a small-dollar loan and making those timely payments, such healthy financial habits reestablish financial stability for the member while showing the credit bureaus the life-changing gains that member has made over time.

Imagine that – the road to financial wellness, right from the computers in their pockets.

Seth Brickman is the CEO of QCash, a lending CUSO based in Olympia, Wash.