Last week, the Consumer Financial Protection Bureau and the Biden White House proposed to limit prices on overdraft protection by banks. This is smart policy and is backed by sound economics.

While inflation ran hot in 2022 and 2023, talk of price controls bubbled to the surface, even in economic circles. University of Massachusetts economist Isabella Weber pointed out that price controls were used successfully during World War II, and deployed effectively by Germany more recently to handle spiraling natural gas prices. Health policy professors interviewed last week by the New York Times noted that other countries, including Canada and France, use price controls to limit inflation in pharmaceuticals. Just a few years ago, price controls were a dirty word in economics—the only imaginable exception being for natural monopolies, where a price cap was set in a way to permit a normal rate of return.

Given the shifting attitudes towards price controls, the CFPB’s overdraft-fee proposal is likely to receive a friendlier reception among economists. The financial watchdog estimates that banks collect about $9 billion annually in overdraft fees, and customers who pay overdraft fees pay about $150 on average every year. Overdraft fees averaged $35 per event in recent years, and a bank can assess multiple fees for one overcharge episode whenever multiple checks bounce due to the overdraft. Moreover, banks engage in practices that induce overdrafts (or greater fees), such as refusing to deposit a check without a ten-day hold or engaging in “high-to-low reordering” (processing a large debit before smaller transactions, even if the latter are posted earlier).

The CFPB’s proposed rule would require banks to justify their overdraft fees on the basis of the bank’s incremental costs; if the banks could not do so, then the fee would be regulated at some price between $3 and $14. The rule would apply to large banks only, which some commentators have pointed out misses some of the worst offenders.

Vulnerable Aftermarkets

Economists recognize that market forces are especially weak when it comes to disciplining the price of ancillary or aftermarket services. The classic teaching example is movie theater popcorn. Customers do not have the price of popcorn on the top of their minds when choosing among theaters; the movie choice and the drive time are paramount. And when they arrive at a theater, customers are not likely to reverse their ticket transaction and find a new theater in response to sky-high popcorn prices; the switching costs would be too steep. The same is true for the price of other common aftermarket services, such as movie rental in hotels and printer cartridges.

Overdraft protection can be understood as an ancillary service to standard checking account services. As one economist at the Federal Reserve put it, “Most bank fees represent an example of add-on or aftermarket fees. Aftermarkets can be found in many industries such as printers (for toner), computers (software), razors (blades) and many others.” When someone is shopping around for where to set up their checking account, they will primarily consider the bank’s reputation and geographic footprint, the proximity of a physical office to their home, and the interest rate offered on savings. Overdraft protection likely is not top of mind, and even if it were, the bank won’t prominently display its overdraft fee on its webpage. Economists have learned through experiments that sending repeat messages to customers with a propensity to incur an overdraft fee was effective, consistent with customers having limited attention.

Indeed, I learned of Bank of America’s overdraft fee ($10) only by invoking the help tab on its website, and then looking through several documents that contained the term “overdraft.” The fee is buried in a document titled “Personal Schedule of Fees.” Given the high costs of switching banks, when a customer is hit with an exorbitant overdraft fee, there is little chance the customer will terminate the relationship—that is, the traditional forces that discipline supracompetitive prices are absent.

The American Bankers Association (ABA) rushed out a statement in opposition to the CFPB proposal, claiming that overdraft fee caps “would make it significantly harder for banks to offer overdraft protection to customers.” (This would only be true if the cap were set below the incremental cost of providing the service.) In support of its opposition, the ABA cited a Morning Consult survey, showing that 88 percent of respondents “find their bank’s overdraft protection valuable,” and 77 percent who have paid an overdraft fee in the past year “were glad their bank covered their overdraft payment, rather than returning or declining payment.”

There’s no doubt bank customers value overdraft protection and detest the notion of bouncing checks to multiple vendors. The relevant economic question, however, is whether market forces can be counted on to price overdraft protection at competitive levels (i.e., near marginal costs). So this survey was a bit of misdirection.

A relevant survey, by contrast, would ask bank customers whether they considered a bank’s overdraft fee when choosing with which company to bank, and whether they would consider switching banks upon learning of the bank’s high overdraft fee. If the answer to either of those questions is no, then bank customers are vulnerable to excessive pricing on overdraft protection.

Who Bears The Burden Matters

The typical customer who bears the burden of excessive overdraft fees is low-income, which means a policy of tolerating overcharges here is highly regressive. Consumer Reports notes that eight percent of bank customers, mostly lower-income, account for nearly three quarters of revenues from overdraft fees. According to a CFPB survey released in December 2023, among households that frequently incurred overdraft fees, 81 percent reported difficulty paying a bill at least once in the past year, another indication of poverty. The CFPB survey also notes that “[w]hile just 10% of households with over $175,000 in income were charged an overdraft or an NSF fee in the previous year, the share is three times higher (34%) among households making less than $65,000.”

When deciding whether to impose price controls of the kind contemplated in the CFPB proposal, the economic straights of the typical overdraft fee payor is important. Economists recognize that customers is aftermarkets are generally vulnerable to high prices, but do not counsel an intervention in each of these markets. A middle-class family that overpays for popcorn at a movie theater does not engender much sympathy; if the price is too high, then can abstain without much consequence. Similarly, learning that an upper-class family overpaid for in-room dining at a boutique hotel similarly does not tug at the heartstrings. But a low-income family that pays a $35 overdraft fee could be missing out on other important things like meals, and is in no position to refuse the service; refusing to comply might jeopardize their credit or banking relationship.

The Element of Surprise

In addition to the weak market forces disciplining the price of aftermarket services, bank customers are particularly vulnerable to exploitation given their lack of knowledge about the fees. The same CFPB survey mentioned above showed that, among those who paid an overdraft fee, only 22 percent of households expected their most recent overdraft fee—that is, for many customers (almost half), the overdraft fee came as a surprise. In discussing the fairness of surprise fees, Nobel prize winner Angus Deaton notes in his new book, Economics in America, that “If you need an ambulance, you are not in the best position to find the best service or to bargain over prices; instead you are helpless and the perfect victim for a predator.” Neoliberal economists might ignore these teachings, and instead trust the market to deliver competitive prices for ambulance services and overdraft fees. But anyone with a modicum of understanding of power imbalances and information asymmetries will quickly recognize that an intervention here is well grounded in economics.

From online banking to e-commerce, advances in technology have given consumers in the digital age new products and services. But the rise of the digital economy has been accompanied by the emergence of digital robber barons. Just as social media companies entrenched their dominance by making it hard for users to port their own content and connections to rival platforms, big banks restricted users’ access to their own financial data to cement their monopoly power. 

Data portability is the idea that users should be free to move their data to rival platforms. Before number portability was mandated by Congress in the 1996 Telecom Act and implemented by the FCC in 2003, cellphone customers faced high switching costs—imagine the hassle of informing your friends and family of your number—which limited churn and kept cellphone prices artificially inflated. Now big banks are up to the same tricks: To curb competition from newer and smaller companies, large financial institutions have restricted consumers’ data portability, by for example, making acts as basic as sharing personal financial data or transferring their own funds with a new institution a hassle.

Fortunately, the Consumer Financial Protection Bureau (CFPB) is initiating rulemaking that would facilitate enhanced consumer access to their financial data. Through a provision of the Dodd-Frank Act known as Section 1033, the agency can help take big banks to task and give emerging financial service providers a fair shot to compete. 

Like other corporate giants that have faced regulatory scrutiny, big banks aren’t going down without a fight. Bank Policy Institute (BPI), a lobbying group whose membership includes Wells Fargo and JPMorgan Chase, argued in a recent comment letter that strong Section 1033 rulemaking would fuel the rise of Big Tech in the financial industry. BPI’s angle is obvious here: CFPB director Rohit Chopra is a noted supporter of regulating Big Tech, and has scrutinized the tech giants’ encroachment into the payments sector while in office.

But BPI’s spin conveniently ignores that Big Tech has been pushing into the financial services industry largely in collaboration with—and not to compete against—big financial institutions. From Goldman Sachs’ partnership with the Apple Card to TikTok’s recently exposed collaboration with JPMorgan Chase, the giants of the financial and tech industries have a vested interest in shoring up their respective monopoly positions. That BPI member JPMorgan Chase is so eager to collaborate with TikTok, a Chinese-based company drawing increasingly intense bipartisan scrutiny and even calls for its ban in the United States, is just the latest and most galling example of these developments.

Contrary to the bank lobby’s self-serving narrative, strong Section 1033 rulemaking stands to foster innovation by giving emerging companies a fair shot to compete against entrenched incumbents in both industries. Indeed, Section 1033 rulemaking will help level the playing field by giving small players and new entrants the same right to access data that Big Tech can already get its hands on quite easily. 

This reality explains why consumer and competition advocates have long argued that strong Section 1033 rulemaking will help encourage competition in the financial services industry. In a 2021 comment before the CFPB, a coalition of consumer organizations led by the National Consumer Law Center argued that “Improved access to consumer-authorized data can benefit competition, which will benefit consumers.” Monopoly power comes at a grave expense to innovation, and at a time when consumers are increasingly interested in alternative relationships, this rulemaking will be a boon to the broader economy and consumer choice.

In the absence of strong Section 1033 rulemaking, access to financial services data risks being decided primarily through backroom dealmaking. It goes without saying that these informal arrangements stand to benefit mega-corporations like Google or Apple, not small players. After all, Google executives will never have a problem getting a meeting with Jamie Dimon, nor will TikTok leadership or the likes of Elon Musk. But emerging players and innovative startups are unlikely to have such opportunities, meaning that a lack of rulemaking will only entrench Big Banks’ gatekeeper status.

It would be a mistake to dismiss these concerns as merely hypothetical. As one recent example, big banks like Chase are fearful that direct account-to-account payment options will cut into their ability to profit off credit card transactions. In response, Chase is using its dominant position to steer consumers away from paying vendors directly from their own bank account. Without strong regulatory intervention, mega-corporations in tech and finance will continue to inhibit the growth of promising new ventures.

Shortly after becoming CFPB director, Chopra noted that “Big Tech companies are eagerly expanding their empires to gain greater control and insight into our spending habits.” He is correct.  With the agency finally initiating rulemaking on Section 1033 more than a decade after Dodd-Frank passed into law, Chopra must reject the bank lobby’s bad faith efforts to water down the rules. The CFPB should empower consumers to fully control their personal financial data in the interest of cultivating a fair and truly competitive financial services industry.

Morgan Harper is Director of Policy and Advocacy at the American Economic Liberties Project.