Time to Act: A Field Experiment on Overdraft Alerts

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

Context

Despite the growth of digital banking and the rapidly expanding offering of money management applications, a substantial proportion of UK banking customers still incur overdraft and unpaid item charges. This can add up: 19 million people use their overdraft each year and firms made 2.3 billion in revenues from overdrafts in 2016.

FCA Occasional Paper 36 found that mandating automatic enrolment of consumers into text message alerts before they incur unarranged overdraft and unpaid item charges leads to a substantial reduction in these types of charges. Despite these considerable savings, few people had signed up for alerts of their own accord: 3-8% had registered for any type of alert by early 2015.

One way of addressing this issue is automatic enrolment. By now, all major UK banks have enrolled their customers to receive just-in-time unarranged overdraft and unpaid item alerts – either on the bank’s initiative or due to a policy that mandated enrolment by February 2018. Given the benefits from alerting consumers of impending charges, the FCA wanted to know whether alerts in addition to those already mandated would be beneficial.

The study

Given the benefits of alerting consumers of certain impending charges, the FCA wanted to know whether alerts in addition to those already mandated would be beneficial.
This research was motivated by three questions:

1. Would consumers benefit from just-in-time alerts on arranged overdrafts usage?
2. Would consumers benefit from early warning alerts for overdraft usage?
3. Would consumers benefit from early warning alerts for unpaid items?

The FCA worked in collaboration with two major UK retail banks to carry out a field trial involving over 1 million Personal Current Account (PCA) customers between November 2017 and April 2018. The field trial was structured into four systems of communication with customers (Trials A-D):

• Trial A provided an experimental estimate of automatic enrolment into unarranged overdraft and unpaid item alerts, by contrasting 2 treatment groups that were enrolled into these alerts in November 2017 and February 2018 (the date by which automatic enrolment became mandatory), respectively.
• Trials B, C and D tested additional alerts, including for low balances and arranged overdraft use, but all customers received the mandated alerts.

The main focus of the study was in the reduction of total overdraft charges, with a further aim to measure the wider impact of automatic enrolment. The authors looked at secondary outcomes to help identify why the alerts work, such as digital banking usage, balances, transaction patterns and the length of overdraft spells.

A telephone survey was also conducted with a sub-sample of participants (n=4,007), to gauge the effect of alerts on awareness of charges, measure participant’s attitudes towards automatic enrolment and to learn more about the actions that people take after receiving an alert.

Key findings

• Consumers do benefit from just-in-time alerts on arranged overdraft usage. The average consumer in Trial D will save £0.28-0.45 in total overdraft charges per month when enrolled into an alert that warns of arranged overdraft usage in real time.
• Evidence of effectiveness of early warning alerts for overdraft usage is weak. Or mixed, at best.
  • Evidence from both banks indicated that an arranged overdraft usage alert is more effective than a £100 low balance alert for arranged overdraft users and evidence from Trial D with Bank 1 suggested that there is no additional benefit from enrolling customers into the low balance alongside the overdraft usage alert.
  • No effect was found on total overdraft charges when notifying consumers approaching their arranged overdraft limit (Trial D, Bank 2).
  • Trial B results on low balance alerts for consumers without an arranged overdraft facility were inconclusive. There was a reduction in total charges for Bank 1 (£0.20 per month), but no effects for the two levels of low balance alerts tested with Bank 2 were found.
• No evidence for effectiveness of early warning alerts for unpaid items. There was no evidence to indicate that enrolling customers without any overdraft facility into low balance alerts led to a reduction in charges. In addition, when consumers are encouraged to self-register for these alerts – and see a registration rate of almost 10% - there was no evidence of any reduction in charges for those registered.
• Survey responses showed that consumers overwhelmingly rely on their own liquid savings, cuts to non-essential spending and informal credit to avoid using overdrafts. Respondents are broadly supportive of automatic enrolment into alerts. The strongest support was for the arranged overdraft usage alert. Importantly, survey respondents did not find them distracting or annoying. Even those who decided to opt-out of receiving alerts supported them.

Points to consider

• Methodological strengths/weaknesses: The methodology used appears sound (incorporating both qualitative and quantitative research methods with large sample sizes) 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: The findings are based on consumer data from two large UK banks, involving over 1 million PCA customers over a six-month period. Care was taken to ensure the representativeness of the sample; we can therefore be confident that the findings are likely to be representative of the UK PCA market.
• Relevance: 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.