In response, regulators are doing more. In the UK, banks must now price overdraft loans using an interest rate that is easily comparable to credit card rates. In the US, banks face new rules for overdraft lending from the CFPB unless they keep overdraft fees below $5.

Prior to the RCT, over half of overdrafts could have been avoided by using savings or lower-cost credit cards. Alerts help consumers achieve less than half of these potential savings. So alerts alone do not lead to optimal borrowing.

Based on these findings, in 2019 the FCA expanded the Competition and Market Authority’s mandate for banks to send customers just-in-time text alerts. Does that mean inadvertent or otherwise suboptimal overdraft borrowing has been eliminated in the UK?

Could early warning help those without funds to transfer avoid charges by reducing their spending instead? Incremental benefits of early-warning cannot be ruled out, but are not statistically significant. Customers reduce spending following alerts, but by very little.

Just-in-time alerts work because they prompt customers to log in to their accounts and transfer in additional funds, thereby avoiding negative balances and fees

We find that a simple nudge, “just-in-time” text message alerts, reduce unarranged overdraft and unpaid item charges 17% to 19% and arranged overdraft charges 4% to 8%, implying annual market-wide savings of £170 million to £240 million.

Excited that our results are now out in "Sending Out an SMS: Automatic Enrollment Experiments for Overdraft Alerts," published in the Journal of Finance doi.org/10.1111/jofi... (thanks coauthors Darragh Kelly, Jeroen Nieboer, @matthewosborne.bsky.social, Jonathan Shaw)