As part of the high-cost credit review, the FCA wanted to understand the impact of automatically enrolling customers into just-in-time arranged overdraft alerts and early warning alerts for overdrafts and unpaid items.
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.
Given the benefits from alerting consumers of certain impending charges, the FCA wanted to know whether alerts in addition to those already mandated would be beneficial. In this paper, we report results of a large field experiment on automatically enrolling consumers into additional alerts.
We test whether consumers would benefit from:
- just-in-time alerts for arranged overdraft usage
- early warning alerts for (arranged and unarranged) overdraft usage, and/or
- early warning alerts for unpaid items
We worked in collaboration with 2 major UK retail banks to carry out a field trial involving over 1 million PCA customers between November 2017 and April 2018. Although we are mainly interested in the reduction of total overdraft charges, we wanted to measure the wider impact of automatic enrolment. We look at secondary outcomes that help us identify why the alerts work, such as digital banking usage, balances, transaction patterns and the length of overdraft spells. We also conducted a telephone survey with a sub-sample of participants, 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.
Our findings are:
- Consumers do benefit from just-in-time alerts on arranged overdraft usage. We find that 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. First, evidence from both banks indicates 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 suggests that there is no additional benefit from enrolling customers into the low balance alongside the overdraft usage alert. Second, we find no effect on total overdraft charges of notifying consumers who are approaching their arranged overdraft limit (Trial D, Bank 2). Finally, the Trial B results on low balance alerts for consumers without an arranged overdraft facility are inconclusive. We find a (£0.20 per month) reduction in total charges for Bank 1, but we find no effects for the 2 levels of low balance alerts tested with Bank 2.
- No evidence for effectiveness of early warning alerts for unpaid items. We find no evidence that enrolling customers without any overdraft facility into low balance alerts leads to a reduction in charges. In addition, when we encourage consumers to self-register for these alerts – and see a registration rate of almost 10% - we also find no reduction in charges for those who registered.
In addition to answering the 3 questions above, one of our trials allowed us to calculate an experimental estimate of automatic enrolment into unarranged overdraft and unpaid item alerts, complementing the staggered roll-out estimates presented in FCA Occasional Paper 36. Although there are some differences between implementations, notably the firms involved and the timing of automatic enrolment, we find that our experimental and non-experimental estimates are remarkably similar. This provides support for the non-experimental estimates, which necessarily rely on stronger assumptions for identification.
Responses to our survey show that consumers overwhelmingly relied 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.
Paul Adams, Michael D. Grubb, Darragh Kelly, Jeroen Nieboer and Matthew Osborne.
- Paul Adams and Jeroen Nieboer work in the FCA’s Behavioural Economics and Data Science Unit. Jeroen is also Visiting Fellow at the London School of Economics.
- Darragh Kelly is a data scientist at Google but completed this work whilst in the FCA’s Behavioural Economics and Data Science Unit.
- Michael D. Grubb is Associate Professor of Economics at Boston College.
- Matthew Osborne is Assistant Professor of Marketing in the Department of Management at the University of Toronto Mississauga, with a cross-appointment to the Marketing Area at Rotman School of Management.
Occasional Papers contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views. The FCA endeavours to ensure that research outputs are correct, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement. To the extent that Occasional Papers contain any errors or omissions, they should be attributed to the individual authors, rather than to the FCA.