Automatically enrolling consumers into overdraft alerts

• Context
• The study
• Key findings
• Points to consider

Context

There are approximately 65 million active personal current accounts in the UK. Incidental charges incurred by consumers on their personal current accounts (PCAs) can be substantial, particularly for relatively small amounts of unarranged borrowing and unpaid items. The competition and Markets Authority (CMA) estimates that in 2014 these charges amounted to £24 annually per PCA, equating to an estimated £1.2 billion across the UK market. While these figures reflect a genuine demand for credit, some of these charges could have been avoided if consumers had been made more aware of their balance. Additionally, previous research from the Financial Conduct Authority (FCA) has shown that consumers who register for mobile banking and text alert notifications manage to significantly reduce these charges. Despite these alerts having been made available to customers of the majority of UK banks for several years, only between 3-8% of have registered for them.

A more recent policy initiative from the CMA required firms to enrol consumers automatically into both unarranged overdraft alerts and unpaid item alerts. However, little is known about the impact of automatic enrolment and whether some sub-groups benefit from it more than other groups.

The study

This 2018 report from the Financial Conduct Authority attempts to estimate the effect of automatically enrolling customers into unarranged overdraft and unpaid item alerts.

The FCA uses a large and detailed dataset containing the transactions from 1.5 million consumers across six major banks from January 2015 to December 2016. The data includes details of customer accounts, customer demographics, overdraft arrangements, account transactions, self-service banking log-ins (online, mobile, etc) and other relevant banking information. The full dataset comprises over one billion account transactions.

The FCA also look at large-scale automatic enrolment exercises carried out by two major retail banks. The samples from the two banks are broadly aligned to the wider market, based on a comparison with representative customer samples from the UK’s six biggest PCA providers.

The focus is on consumers that use their PCA as their primary payment account and that are responsible for the charges incurred on their accounts. As a result, dormant accounts, secondary accounts, accounts belonging to defaulted customers and accounts with ‘uncharacteristically high levels of activity’ are excluded.

Key findings

• The report finds automatic enrolment into both types of alert has a large effect on charges.
  • Automatic enrolment into unpaid item alerts reduces charges by 21-24%.
  • Automatic enrolment into unarranged overdraft alerts reduces charges by 25%.
• The treatment effects for different types of consumers are also estimated, grouped by their ‘pre-alert’ level of incidental charges (rare, occasional or heavy). The vast majority of consumers fall into the first category, with occasional and heavy ‘users’ of charges accounting for less than 10% of consumers.
• The benefits of automatic enrolment differ markedly between these three groups of consumers in regard to unpaid items.
  • Those who rarely incur charges can avoid as much as half of the charges following the alerts (charges reduced by 27-51% of previous levels).
  • However, heavy users still incur most of their charges following automatic enrolment, though do still see a reduction of between 10-16%.
• The differing benefits of automatic enrolment into alerts are also seen in regard to unarranged overdraft charges.
  • Those who rarely incur charges reduce their monthly charges significantly (43%).
  • There are negligible/no effects for occasional and heavy ‘users’ of charges.
• There are no large or statistically significant effects other than the key expected outcomes (charges for unpaid items and overdraft charges). For example, there were no significant effects on consumer balance levels or arranged overdraft charges.
• Overall, the findings provide support for automatic enrolment as there is a statistically significant reduction in charges for consumers who are automatically enrolled into alerts.
• Simply making an alerts service available to consumers does not mean it will be taken up by likely beneficiaries.
• The benefits of automatic enrolment differ between consumers. A large number of heavy users of unarranged overdrafts and unpaid items are not helped by automatic enrolment into alerts.

Points to consider

• Methodological strengths/weaknesses: The methodology used appears sound and the findings are tested for statistical significance, so we can have a fair degree of confidence in the robustness of the findings.
• Generalisability/ transferability: This report is of significant interest to stakeholders and policymakers in the field of consumer financial behaviour, and of particular relevance to those studying the effects of automated alerts in relation to consumers’ current account activity and the charges they incur.
• Relevance: The findings are based on consumer data from six large UK banks. The authors state that the detailed dataset covers ‘consumers [who are] representative of 90% of the market’. The findings are therefore likely to be representative of the UK PCA market.