The Impact of Price and Messaging on Bank Overdraft Usage in Turkey
Add-on prices on financial products, such as penalty fees, can be complex and deceptive. Little rigorous evidence exists on whether consumers understand these fees and why they use these products and incur costs. To address this issue, researchers examined the impact of informational reminders and price discounts on bank clients’ overdraft usage in Turkey. They found that messages promoting an overdraft discount actually reduced overdraft usage, potentially because the discount message reminded individuals of the costs associated with an overdraft.
Add-on prices on financial products, such as penalty fees, can be complex and deceptive. For example, many banks derive a large amount of revenue from overdraft fees on checking accounts that fall into negative balances. But it is unclear what effect these pricing strategies have on consumers. If the overdraft fees are not made explicit, bank customers may underestimate overdraft likelihood and incur costs that they would prefer to avoid if they were better informed or aware. On the other hand, bank customers may be willing to pay these fees for the convenience of having continued access to their accounts. Government regulators have been increasingly scrutinizing these financial product pricing policies, but little rigorous evidence exists on why consumers use these products and incur costs. Do consumers understand these add-on costs? To address this issue, researchers examined the impact of informational reminders and price discounts on bank clients’ overdraft usage in Turkey.
Yapi Kredi is one of the five largest banks in Turkey’s retail banking sector, which is highly concentrated. The banking sector is well developed, with the highest percent of mobile banking users in Europe among internet users in 2013. Yet over half the Turkish population remains unbanked and many checking account holders have credit scores that are too low to qualify for overdraft lines of credit. Thus, overdrafters in Turkey are likely among the relatively rich, although likely not the richest, who have the wealth and access to cheaper credit that would make overdrafting unlikely. As in many other places in the world, such as the U.S. and the U.K., overdraft services are an important profit source for banks in Turkey. However, these services are rarely featured in marketing to potential customers.
Researchers partnered with Yapi Kredi to conduct several randomized evaluations to examine the impact of SMS reminders and price discounts on bank clients’ overdraft usage. Researchers randomly assigned 108,000 existing checking account holders with overdraft services to receive one of six SMS messages beginning in September 2012. They compared the impact of these various messages, and their combinations, to understand how messages about different types of financial products could affect recipients’ overdraft usage.
Some individuals received an SMS offer of a 50 percent discount on overdraft fees. Others were offered extra rewards points, which could be redeemed like cash, for authorizing automatic bill payments from their accounts, and a third group was offered extra rewards points for using their debit cards. Others received both the overdraft discount and the auto-debit offer, or the overdraft discount and the debit card offer. Finally, a sixth group received the overdraft availability reminder with no additional information on cost.
While all participants received one message in September, afterwards, participants were additionally randomly assigned to receive the SMS messages more frequently (every ten days), less frequently (every twenty days), or not at all during the intervention. The messaging intervention also lasted longer for some randomly selected individuals, ending in November for some and in December for the others. Researchers used administrative data to measure the impact of the various messages six months after the end of the intervention.
Results demonstrated that messages promoting the overdraft discount actually reduced overdraft usage, potentially because the discount message reminded individuals of the costs associated with an overdraft. Individuals who received the overdraft discount offer were 4.0 percent less likely to overdraft during the intervention relative to those who did not receive the discount offer, driven by a decrease in overdraft usage among those who also received the debit card offer. In contrast, the overdraft availability reminder that did not mention costs increased overdraft usage by 2.9 percent.
The 50 percent discount in overdraft fees may have counterintuitively reduced the demand for overdraft services because the discount message reminded individuals that there are costs associated with overdrafting. The reduction in demand was even greater when the overdraft discount was bundled with the debit card discount because the message reminded individuals of both overdraft costs and the way to reduce those costs. Simply reminding individuals that overdraft services exist increased usage because there was no reminder of the cost. These results suggest that consumers incur overdraft fees largely due to inattention and limited memory.
Receiving messages of any type more frequently and for a longer amount of time amplified the effect of the message. However, there was no evidence of long-term effects; none of these changes in behavior lasted beyond two months past the intervention.
Overall, these results suggest that banks do have incentives to obscure add-on prices to financial products, but that these pricing policies are inefficient for the consumer. Reminders about these fees can lead to better consumer behavior, but these changes in behavior do not last very long without sustained messaging, presenting a difficult regulatory challenge.
Alan, Sule, Mehmet Cemalcilar, Dean Karlan, and Jonathan Zinman. 2018. "Unshrouding: Evidence from Bank Overdrafts in Turkey". The Journal of Finance, 73(2): 481-522.