Canada has finally put a much lower ceiling on non-sufficient funds fees.
That is good news.
But in a recent Globe and Mail column, I looked at research suggesting there may be a better way to protect consumers than simply reducing the size of the penalty after it has already been triggered.
The answer may be better-timed alerts.
A U.K. study tracked 1.1 million banking customers and tested automatic text messages sent when overdraft risk became immediate.
These were not generic low-balance warnings.
The alerts were sent when a scheduled payment was about to be declined, or when a customer had entered an unarranged overdraft but still had time to move money and avoid a charge.
The result was a 17- to 19-per-cent reduction in overdraft and unpaid-item fees.
That matters because many banking penalties are caused by timing rather than chronic overspending.
Income may arrive biweekly while rent, subscriptions, utilities and other payments come out on different schedules. A deposit landing one day late or a payment leaving one day early can be enough to trigger a fee.
Canada already requires federally regulated banks to send electronic alerts when an account balance falls below a set threshold.
That is useful, but it is still fairly blunt.
A more effective system could tell you that a specific payment is about to hit, exactly how much money is missing, and how much time you have to move funds before a fee is charged.
That is a much more actionable warning.
Good consumer protection should not only focus on making penalties smaller.
It should also use technology and behavioural insights to help people avoid preventable penalties in the first place.
Sometimes the best fee is the one that never gets charged.
Preet Banerjee
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