By all accounts, the outlook for overdraft programs is encouraging for community banks.
Increasingly more consumers are choosing to access the service as a short-term funding solution, while regulatory burdens are easing. Banks that manage their customers’ overdrafts with outdated programs—those that do not put their account holders’ best interests at the forefront or utilize outdated technology and procedures—cannot capitalize on this real opportunity to improve service and compliance, as well as fee income.
The Overdraft Landscape
According to Moebs Services Inc., an economic-research firm, overdraft revenue increased 3 percent industry wide from 2016 to 2017, the largest increase since 2009, and is on pace to an all-time high above $37 billion by 2020.
One reason for this increase in overdraft fee income is more consumers are making the decision to access the service when funds fall short. Moebs Services reported there were approximately 1.12 billion overdraft transactions in 2016, up from nearly 1.09 billion in 2015. According to a 2017 Wall Street Journal article, these numbers suggest many consumers consider overdraft a safety net—a convenience—for which they are willing to pay a price. Analysts said in the WSJ article that the increase in overdraft revenue should be expected, since rules and regulations have been in place for some time now.
In addition, the Consumer Financial Protection Bureau withdrew overdraft rulemaking from the agency’s spring rulemaking agenda in May after having been on the agenda for years, signaling that no new overdraft regulations will be forthcoming.
With this landscape set, how should your bank capitalize on it?
A Data-Driven, Automated Solution
The first place to start is to review your current overdraft procedures and software capabilities to ensure you are using a modern, data-driven solution—one that automatically manages risk and strives to meet customer expectations. Although there are several essential components of such a system, two are listed below.
Updated automated overdraft programs should enable your bank to set individual overdraft limits that align with an account holder’s ability to repay the overdrawn balance. The software analyzes the key risk variables of your accounts, identifies the accounts that have the highest probability of charge off and calculates individual “intelligent” limits. It then reassesses that ability to repay daily.
Providing these dynamic limits helps to serve customers better than employing fixed overdraft limits (where the same overdraft limit is assigned to every customer of a certain account type) by granting higher overdraft limits to those customers whose ability to repay warrants it, while pulling back on those who have more limited repayment capacity.
Just as important, using intelligent limits addresses the Federal Financial Institutions Examination Council (FFIEC) 2005 Joint Guidance on Overdraft Protection Programs, which states, “Institutions also should monitor these accounts on an ongoing basis and be able to identify consumers who may represent an undue credit risk to the institution. Overdraft protection programs should be administered and adjusted, as needed, to ensure that credit risk remains in line with expectations.”
Reg. E Outreach
Eight years have passed since most banks conducted a formal outreach program in response to the 2010 Amendment to Regulation E, or Reg. E, which requires affirmative consent from customers for banks to charge an overdraft fee on ATM and one-time debit card transactions. Does your board know the number of customers who did not provide a decision back in 2010 or at a subsequent account opening?
Without consent, banks do not extend overdraft privilege through these channels, which can result in multiple unexplained debit card declines. Customers may not recall making a Reg. E decision or are unaware it is even an option, which leads to confusion and irritation for the customer.
Data-driven overdraft software allows your bank to identify these denied transactions and sort them by a customer’s Reg. E decision. With this knowledge, you can reach out to those customers who have not provided a decision and explain the reason for the denial, offer overdraft alternatives and obtain a Reg. E preference. Customers appreciate this level of communication, which provides assurance your debit card will consistently help them meet their liquidity needs.
Capturing just a few percentage points more Reg. E opt-ins can result in a tangible increase in both interchange and fee income as well. A qualified third-party overdraft provider will offer employee training, best practices and scripts to ensure your Reg. E outreach program is successful and compliant.
Is your bank positioned to capitalize on the opportunity for better service and income that a well-run overdraft program represents? With the right technology and procedures, you can.