Hi, I’m Joe Gillen CEO and Founder of Pinnacle Financial Strategies. In the interests of full disclosure, we at Pinnacle provide community banks and credit unions with consumer-focused overdraft programs that are successful, efﬁcient, and 100% compliant. We believe that consumers deserve the freedom to choose an overdraft privilege product that is fairly administered, delivers real value and provides a genuine consumer service, and is a useful tool in dealing with unexpected financial challenges.
For the past couple of years, I’ve been asked by many community banks and credit unions why their service charge income, specifically overdraft and NSF fees, seems to have declined over the last few years.
Well, four years ago this month, Reg E went into effect for all financial institutions in the US. It’s had a dramatic impact on service charge income, specifically overdraft income. Service charge income for our industry decreased by over 65% since 2009 — from $41B down to $32B.
Reg E, as you know, requires a consumer to opt-in to a debit or ATM overdraft program. In 2010, most institutions spent a lot of money, time and effort making sure they communicated opt-in to their existing accountholders. Most believe they did an excellent job providing consumers the information necessary to decide whether or not to opt in to overdraft coverage.
The problem is, that since August 2010, most financial institutions have replaced about 40% of their customer base. That means, each year since Reg E, you have opened accounts for about 10% of your current accountholders. I’m quite sure that, like many of the financial institutions whose overdraft privilege programs we’ve re-launched over the last 4 years, the focus is no longer on Reg E and opt-in. Opt-in has become simply a regular part of account opening — just another form that’s handed to the consumer; just one more among the many pages required by law. Frankly, once that consumer walks out the door of your branch, the opportunity for opt-in has gone.
Consumers decline to opt in for many other reasons as well.
- Lack of training for front-line employees that precludes them from effectively and clearly explaining the program
- Fees that are too high
- Too much negative press and sensational stories about exorbitant charges
- Stories about regulators levying fines against banks
- Hints that the CFPB is going to “outlaw” overdraft privilege programs
The list goes on.
Well-run overdraft privilege programs are a value-added service for a great many consumers. They know this and that’s why they’ve chosen to opt-in as part of their financial management plan.
The fact is that the people who want, need and use overdrafts have not gone away. They still exist. They still believe that the service has value, especially when your program is designed with them in mind. What does that mean?
- Properly priced overdraft fees
- Manageable limits
- Reasonable tolerances
- Daily and monthly fee caps
- Simple, clearly defined rules given to each accountholder so there are no surprises
- And, finally, a service supported by your management team, and understood and accepted as a value added service by your employees.
I don’t see any substantial changes to overdraft privilege programs in the immediate future. In the first quarter next year, service charge income will be reported in separate consumer and business lines. This change will provide regulators a way to track overdraft and NSF fees on a real basis rather than trying to extrapolate these fees from the current general bucket. I believe that the regulatory agencies along with the CFPB will collect and analyze the data from the revised 2015 call reports as a basis for whatever changes or adjustments they plan to bring to the segment.
In the meantime, you can operate a consumer-focused, compliant and profitable overdraft privilege program.
Sign up now for our FREE "Is Overdraft Privilege Worth Saving?" webinar on Wednesday, September 24 at 12:00 p.m. CDT.