SCOTTSDALE, Ariz.–The idea of using overdraft protection plans to help consumers and the economy ward off the worst of the financial pain from the coronavirus pandemic continues to get support.
As CUToday.info reported here, Mike Moebs, economist and CEO of Moebs $ervices, has proposed the $46.1-billion in unused overdrafts in the U.S. be tapped to help consumers.
Similarly, economist Arnold Kling has also proposed on his blog a national overdraft protection plan that the Wall Street Journal summarized this way: “Every bank account would have added to it a line of credit, at low interest, backed by the federal government. The credit line would be the sum total of all deposits made to the account in January and February. This bases the credit line on account holders’ pre-Covid-19 revenue streams, not their bank balances or creditworthiness, allowing them to borrow as needed.”
Government Checks Insufficient
In both cases, the economists are suggesting the overdraft protection proposals are needed because the approximately $1,200 checks the federal government is planning to send to most Americans simply won’t be sufficient.
In his own analysis of Kling’s proposal, Ron Shevlin, managing director of fintech research at Cornerstone Advisors, explained on the company’s Snark Tank blog that Kling believes the program should last for a specified period of time after which the checking account holder would have to cover any credit provided in order to avoid a penalty. Shevlin noted Kling envisions a number of advantages to his proposal, including:
- Fewer forbearance regulations. According to Kling, “The government doesn’t have to impose mortgage forgiveness, utility bill forgiveness, car payment forgiveness, and so on. People can use their credit lines to pay their bills.”
- Lower cost. The government (i.e., taxpayers) would only have to cover defaulted loans.
- Less lobbying. “Kling believes that, under his proposal, there will be less incentive for individual industries to lobby because assistance would shift away from government grants,” noted Shevlin.
The Real Users
Kling himself wrote in making his proposal, “People and businesses that need to draw on the credit line can do so...[those] with no need for it will not use it. Users will be temporarily strapped individuals and businesses who expect to get back on their feet once things return to normal.”
In his analysis, Shevlin added, “The beauty of Kling’s plan is that it: 1) Provides a lifeline for people who may need it over the next few weeks and months, and 2) Gets relief to the people who already need it the most.”
Shevlin cited a recent survey of U.S. consumers by Cornerstone Advisors, that found 71% of those with a bank account had no instances of paying an overdraft fee on their account in 2019, 14% paid one overdraft fee, 8% paid two, and 7% had three or more occurrences of overdrafts in 2019.
“Across a range of financial health measures, consumers who overdraw on their accounts lag consumers who don’t,” wrote Shevlin. “ Nearly six in 10 consumers with no overdrafts consider their financial health to be decent or excellent. That percentage declines as the number of overdraft fees paid rise to just 18% among consumers with three or more overdraft charges.”
Certain Stipulations
Shevlin added, “The government shouldn’t provide this overdraft protection without certain stipulations to ensure accountability for the use of the funds, however,” and added, “Providing useful tools and resources will be the challenge.”
Shevlin’s full commentary can be found here.