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      Home » Checking, Compliance, Fee Income, Product, Regulatory

      Overdrafts: The Fees They Are a-Changin’

      Submitted by on Wednesday, October 7, 200916 Comments
      Overdrafts: The Fees They Are a-Changin’

      Jamie Dimon and Ken Lewis must have both spent the weekend of September 19th reading “The Giving Tree” by Shel Silverstein.  How else can you explain the sudden change of heart that each of their institutions announced in the subsequent week regarding some of their overdraft policies?  The press release for both the Chase and Bank of America announcements heralded the fact that the changes were being made to help customers.  While the growing sentiment of customer dissatisfaction certainly contributed, the reality, of course, is that the possibility of future legislation concerning overdraft programs played a significant role as well.  Getting ahead of the legislation may accomplish two things:

      AFP/Getty Images

      AFP/Getty Images

      1. Provides an opportunity to at least get some positive PR and goodwill by making the changes now rather than just complying with a new regulation in the future.  These institutions have been battered in the mainstream media in the last year and could definitely use a positive story.
      2. By acting now, perhaps the push for policy change will ease up a bit and potentially be more lenient than it would have otherwise been.  It’s as if they’re saying to Washington, “We’ve taken care of it already, you no longer need to waste your time with that silly legislation you were thinking about and get back to helping the industries that really need overhaul, like those crazy car companies!”  They are hoping to exert some control over the degree to which their non-interest income streams are reduced.

       

      The key changes outlined in the Chase press release are:

      • Customer must opt-in to overdraft services for debit card transactions (both new and existing accounts) rather than opt-out
      • Daily cap of 3 overdraft fees on any given day (down from 6)
      • Balance grace zone – no overdraft fee until balance is less than -$5
      • Priority posting order changed to chronological for debit card and ATM transactions (instead of High to Low).  Posting order for checks is still High-Low.

       

      Highlights of the Bank of America announcement, along with comparison to Chase’s changes, include:

      • New customers will have to opt-in to overdraft services (starting June 2010); existing customers will still have to opt-out (although process to do so will be “improved”)
      • Daily cap of 4 overdraft fees on any given day (down from 10)
      • Balance grace zone – no overdraft fee until balance is less than -$10
      • Starting June 2010, annual limit on the number of overdraft incidences on debit card transactions (limit T.B.D.)
      • No change to priority posting order for debit transactions (High to Low)

      In a New York Times article published on September 22nd, a spokeswoman for Wells Fargo indicated that the bank had “no immediate plans to make changes to its overdraft policies.”  Wells’ definition of immediate is apparently different than mine, because in a classic case of “Oh sh*t, I guess we’d better do that too,” the next day they, too, released a statement announcing the following changes:

      • Allow customers to opt-out of overdraft services
      • Daily cap of 4 overdraft fees on any given day
      • Balance grace zone – no overdraft fee until balance is less than -$5

      The only bank left from the Big Four, Citibank, took a slightly different approach and simply took the opportunity to convey the existing benefits of their overdraft program.  A link from the front page of their Web site pointed out the following:

      • Overdraft is not linked to ATM or debit card transactions (purchase simply won’t be approved)
      • Daily cap of 4 overdraft fees on any given day

      While it’s easy to be cynical on the timing of the announcements, they do mark an important realization on behalf of the nation’s largest banks.  Whether it’s driven by altruism or governance, they clearly understand the mounting pressures facing revenue generated through punitive non-interest income.  My colleague Bob O’Meara dissected this conundrum as it relates to the free checking model in this prior Raddon Report post.  As we continue down this path of reduced reliance on existing fee income streams, there are a few things to keep in mind as your institution bridges these waters:

      Know the current contribution that you collect as a result of each of your fee policies. 

      Inherently, this will allow you to see what you stand to lose based on a mandated or voluntary policy change.  If you could no longer provide overdraft services on debit card transactions, what dollar amount is at stake for your institution?  As an example, RFG recently analyzed the account level data for over 400 institutions as part of our CEO Strategies Group program to determine the annual NSF income generated on each checking account.  We found that institutions that post checks in descending order of the check amount (“high to low”) generate 9 percent more NSF income than their counterparts that post in ascending order (“low to high”), even though both groups had virtually the same average NSF fee ($26.84 v. $26.49).  There are, of course, other factors that can influence this percentage, which is why it is critical to determine the fee decline your institution might experience through any number of policy changes.  Make no mistake, Chase, BofA, and Wells knew the monetary impact (probably to the penny) that each of their changes would have on their institution.  Even though their critics will contend that they simply picked the ones that have the least financial impact, they likely also …

      Have a plan to replace this lost revenue. 

      Once you have run through all of the different change scenarios, you have some targets to shoot for.  The challenge in the current environment is identifying ways to do this without further weakening a fragile relationship with your customers.  Right or wrong, the average consumer’s mindset has been shaped by events, and perceptions of events, that have occurred in the last several years (sub-prime lending, TARP, questionable fee policies by some, etc.).  For many, these issues cloud the fact that the services provided by banks are not cost-free to the institution, and need to be paid for in some manner.  Unfortunately, the options to do so are rather limited:

      1. Reduce expenses
      2. Manage the interest spread between deposits and loans
      3. Generate non-interest income

      All three are viable options when looking for ways to offset the loss of existing non-interest income streams, but the key is to have a plan in place ahead of time.  Will you rely on increased efficiencies?  Will subtle changes in your product mix and pricing be enough to offset the decline, without driving away customers due to less attractive rates?  Can you identify new sources of non-interest income that are more transparent to your customers or are non-punitive?  Can you make it up in volume by increasing penetration in key products such as checking?

      Do you intend to change your overdraft fees in response to announcements by B of A, Chase and others?

      • Yes (33%, 73 Votes)
      • No (67%, 145 Votes)

      Total Voters: 218

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      Be prepared to quickly react to changes and news events. 

      Doing the preparation outlined in the first two bullet points will enable you to remain nimble and act upon the opportunities that these types of changes might present to your institution.  This doesn’t necessarily mean you need to match the changes made by your competitors, move by move.  No one is going to switch checking accounts simply because your daily overdraft cap is set at 2 instead of 3.  But being prepared puts you in a much better position to respond to any major competitor or regulatory changes that occur, with minimal disruption to your financials and customer base.  If your institution has taken a pass on certain fee income streams in the past as a benefit to your customers, this is also an obvious time to promote those competitive advantages to both your existing customers and your market.

      As Bob Dylan professed 45 years ago, although I’m pretty sure he wasn’t talking about how financial institutions might be able to respond to legislative actions against overdraft programs, “You better start swimmin’ or you’ll sink like a stone; For the times they are a-changin’”.

      Consider an organization-wide revenue enhancement program.

      The key to increasing revenue is to drive services per household, cross sales and identify new sources of non-interest income across the entire enterprise. This entails a thorough review and analysis of the product set  — consumer and business transaction accounts; consumer, commercial and residential lending; and user and service ancillary fees — to identify gaps or variances within the competitive market.  RFG offers an organization-wide revenue enhancement program to produce a comprehensive road-map from which management can, over time, expand both the customer base and revenue base.

      Contact RFG for a strategic analysis of revenue improvement opportunities and implementation solutions.  Call 800.827.3500 or email.

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      16 Comments »

      • Jeffry Pilcher said:

        Why does is take the threat of an Act of Congress to get financial institutions to respond to customer concerns? For years, financial institutions knew their self-serving overdraft policies were making customers mad. What consumers have been hearing financial institutions say is, “We know this pisses you off, but we make a lot of money off it. You’re broke. We’re greedy. Too bad.”

        And the financial industry wonders why its got a bad image?

        In any other industry, competitive forces and innovation would have yielded a wide range of creative solutions years ago… not when Congress is holding a gun to your head.

      • Wade Griffith said:

        Has anyone else been around long enough to remember that it used to cost $50-100/year just to have a checking account? Isn’t it interesting that those who like to bash OD fees neglect to mention that the basic checking account is now free and includes services (online banking, bill pay and debit card) that were unheard of in the good old days of monthly account service charges.

        I heard today that B of A intends to do away with Free Checking in the wake of their OD Fee changes. Is it time that we all exorcise the ghost of Wa Mu? Hide and watch!

      • Holly Reed said:

        Why do consumers complain about overdraft fees to begin with… Consider the cost of a merchant/business returned check charge when a bank returns an insufficient check on your mortgage payment. Many merchants/businesses charge phenomenal fees for processing a returned check. I haven’t heard of any legislation being considered to combat these fees. A return check charge imposed by a merchant/business can cost the consumer just as much as a bank overdraft fee, if not more. Top this off with the fact that the merchant/business can state that they’ll no longer accept personal checks from a consumer after a set number of returned checks, causing consumer inconvenience. In the end, the consumer will still be screaming at the financial institution for returning the check.

        When financial institutions are forced to change overdraft policies, whether it be eliminating the overdraft fee all together or demanding an automatic opt-out, the majority of consumers will still be dissatisfied. Many consumers fail to recognize the bare bones truth – if the money is not there, “Don’t use the debit card or write the check”; balance the checkbook! Eliminate your dissatisfaction of paying overdraft fees by simply managing your bank account properly.

      • Jurie said:

        The best consumer advocacy action is to make overdraft fees opt-IN, naturally along with very clear disclosures, alerts etc.

        The rest of the changes are likely of no benefit to 99.9% of bank customers, per “Chase, BofA, and Wells knew the monetary impact (probably to the penny) that each of their changes would have on their institution.”

        Thus you can be sure if BofA reduced it from a cap of 10 fees a day to 4 (still what around $120/day) they looked at their distribution of fee incurrences per day, impact on income and determined that a reduction to 4 would have minimal changes in revenue. Think of the average number of transactions you may incur in a day and realize that 10 is an unlikely scenario in the first place. And you would sort of hope if you did incur $300 in fees in one day because you bought coffee, lunch, recharged bus fare, etc 10 separate times that a banker would be somewhat accommodating and at least waive a portion of such a ridiculous fee!

        OPT-IN for all customers, existing and new, in my mind would be the biggest win for consumers. $5 grace, caps of 3 or 4 is not real progress.

      • Darren Carfano said:

        Holly,

        I couldn’t agree with you more. When did the concept of “having enough money before you spend it” go out the window, in favor of coddling customers who feel they have been taken advantage of?

        I’m all about consumer advocacy and protection – and there were definitely some institutions that took advantage of vulnerabilities during the past few years. But what about the institutions that have had conservative OD policies? We never advertised our OD programs, we have favorable posting orders and NSF caps, our fees are in line, and we preach responsible financial management to our customers.

        It’s a good opportunity for banks and credit unions who have been doing the right thing all along to send out good PR -

      • Jim Kelly said:

        Once again we will be forced to change the rules to compensate for those that are less responsible. While on the face of it, it appears we are doing a wonderful thing by reducing these fees, lets not forget we play in a zero sum game.

        Who do you thing will cover the lost income? You guessed it…those of us that get loans and make deposits.

      • Rauly Butler said:

        Will big banks apply these changes to all accounts or only to consumer accounts? It is the business customers who have the multiple items come through, not the consumers.

        And what about floor limits and stand in limits? Who will explain to the consumer that their transaction was approved based on availability of communication links and not due to greed on the bank’s part?

        Finally, will posting order be chjanged so that ATM and POS post “as of” for weekends, thus overdrawing customers who planned on a Monday deposit to cover them? High to low for check posting order is a sham. With the matrix programs in use today, these “important” items would have been paid either way, it’s only the bank that profits. We all know the large number of items paid into NSF status and the few items returned – it’s the same for the banks that post high to low.

        In memorium: I look back fondly to the days where a manager came in early, called the customers and made the pay or return decisions. The overreaction by regulators and politicians will ensure that we do not do our best to help our customers…

      • Leslie Frysinger said:

        It is amazing to me that fingers are being pointed once again at financial institutions!! Doesn’t the consumer have any financial responsibility? As a consumer, this is not an issue for me. I make sure that I have the funds in my account before I write a check or use my debit card. I also don’t care how the financial institution processes my checks (the few that I write these days!) Again, if the money is in my account prior to making purchases, it is not an issue. However; I do like the idea that if I might happen to make a mistake (we are all human), my credit union will pay that check for me and save me from the embarrassment of writing a “bad check” and it will also protect me from additional fees that would be charged to me by the merchant. I would gladly pay the fee incurred by my mistake. There is no excuse for repetitive misuse of managing an account.
        Again, I ask why do we constantly have to protect the consumers that mismanage their money? Maybe we need to focus on financial education. Where do we draw the line on Consumer Protection? Who protects the financial institutions that are constantly losing money from consumers that do not pay for returned checks, negative accounts, fraudulent activity and account misuse? It might be time for Congress to think outside of the box. Who is really the victim here?

      • Jerry S. said:

        Holly is 100% correct!!! This legislative move is much more of a “photo op” for congressmen by letting them tell their constitutents that they have taken the bad financial institutions to the woodshed and have protected the consumers in the end. Baloney!!! It’s going to work exactly opposite of how the legislative gurus (that is probably an oxymoron) think it will. If all OD programs went away the consumers would be killed by paying double return check fees (one fee to the merchant and one fee to the financial institution) and as was already pointed out, the merchant fees can be significantly higher than the financial institution fees.

        If Congress is so opposed to people spending money before they have it, perhaps Congress should set a good example and start practicing that at the Congressional level with our federal budget…nah, never will happen…

      • Paul Stull said:

        B of A and Chase have done a good job of figuring this out, but I think morre may be going on here. Could this plan actually boos their NSF income?

        Consumer behavior is a stange thing. Offering consumers items at a “new low price” sometimes increases overall sales. Even the daily limit may make consumers feel, “what the heck, the most they can get me for is 4 items”.

        My feeling is that while changes may have been made, they may actually boost NSF income or at least keep it even.

        Research has been done concerning giving away 2 or 3 NSF’s and I believe that it actually boosted NSF income. This may follow suit.

        Bob OMera could do some research on this subject.

        I could be giving these guys way too much credit, but I am sure thay have thought this out.

      • Zach S. said:

        I agree with some of you who advocate personal responsibility of consumers. It makes sense for most of us that you should not spend if you don’t have in you account. However, in my banking experience as a branch manager working for BofA and the worst bank I know TCF, the bank policies are in fact unfair and take full advantage of those few who struggle to balance their book. What I have found that their are those who simply lack money management skills and are God send gift to the banks and then their are those that are pretty good with their money but fall prey to money making scheme of the banks. I can recall so many examples when customers would come up to me about over-draft charges that are simply wrong. For instance, processing a large debit ahead of several smaller debits certainly generate more overdrafts. How about overdraft when you are account goes -$1 or -$2? In my view, the legislation is needed to limit the charges bank can collect. In the end, those who can’t balance the check book will ultimately pay for their overdraft because of their own doing and not because bank is out to get them.

        Lastly, the intentions of our elected representatives are questionable. I am not sure how much they actually care for the average person on the street. If they cared enough,they would not have be in bed with the lobby of banking industry and this legislation would have been done long time ago. I think it sounds to me they are out to strengten their own vote bank.

      • Jeffry Pilcher said:

        Why must financial institutions become hostile and defensive whenever someone suggests changing or modifying policies. (Congress may be talking about eliminating OD altogether, but that’s overreacting.)

        Yes, fee income is important. Yes, it is the consumer’s responsibility to manage their finances. But are financial institutions so addicted to overdraft fees that they are completely shutdown to looking at the options? Sounds like it…

        There are ways to MODIFY — not ELIMINATE, MODIFY– overdraft policies. If financial institutions want to (1) retain OD fee income, and (2) keep Congress off their backs, they had better (3) start listening to their customers. I can’t think of any other industry that fails to respond when so many customers have been so pissed off about one single thing for so long. This has nothing to do with ethics or about what’s fair either. It’s about managing your brand and reputation while balancing profitability.

        Consumers have said OD is something they want to see changed, and they’ve screamed loud enough to get their legislators’ attention. Either the industry can make those changes, or Congress will. It’s shocking that it’s come to this. Why has it so hard for financial institutions to accept that all they need is a little marketing- and pricing creativity?

        Dig your heels in and choose to ignore OD modifications at your own peril, and watch the smart marketers turn overdraft into something that becomes a competitive/marketplace advantage. But if changes aren’t made and options aren’t available, you can kiss “competitive market forces” goodbye and say, “Hello Uncle Sam.”

      • Jeff Schroth said:

        I’m kind of fascinated that in neither the article nor the comments has anyone mentioned that, given the timing and the content of their individual press releases, these two giant financial institutions clearly seem to have discussed their respective pricing policies and plans with each other, perhaps even agreeing between them on a general set of new policies or policy positions…

        Aren’t these guys competitors? Isn’t that pretty much a blatant violation of anti-trust law?

        Or do we ignore that now as long as the results have the appearance of being in the consumer’s interest?

      • Jeffry Pilcher said:

        Re: Jeff Schroth’s last point… To me, it seems there has been a large degree of tacit collusion in the structuring of OD policies. “Hey everybody, if we all stick together with the same basic OD policy, then unhappy customers will have no one else to turn to.”

        It wouldn’t surprise me if BofA and Chase swapped notes prior to unveiling their OD revisions. But I’d chalk it up to something more like a coordinated, counter-Congressional lobbying effort than some sort of “price-fixing” style of collusion.

        BofA and Chase probably bumped into one another at some Congressional inquiry (lots of opportunities lately) when one says to the other, “You know if we don’t do something about OD, Congress will. Maybe we should both see what we can come up with, then coordinate our PR dates for maximum impact.”

      • Carla Swift said:

        It seems the definition of “overdraft protection” has become muddied. The Federal Reserve Bank and others identify the practice of paying an item when funds are not available (taking the account negative) as “bounce protection” or “courtesy pay” — and as “a service the consumer has not signed up for.”

        Herein lies the real issue: the consumer didn’t agree to this so-called “protection.” If true overdraft protection is available (from a savings account or a line of credit), and the consumer signs up for this protection, he or she has agreed to the fees and the whole discussion changes. So let’s call it what it is — bounce protection or courtesy pay, not overdraft protection.

      • Len said:

        It’s interesting to see both sides chime in, but the bottom line is don’t spend what you don’t have and don’t overcharge (cheat) the consumers that manage their funds correctly. It’s to easy to lay blame on either side, but for just a moment if each side would think responsibly.. I know it’s harder then it sounds.

        But businesses vs consumers c’mon they both need each other and are each other, last time I checked there are no businesses that don’t consume and no consumers that don’t need businesses it’s a lot simpler then gets stated most time.

        Money truly is the root of all evil..

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