Understanding the
Overdraft Fee Dilemma
As overdraft fee concerns increase throughout the banking industry and Congress, let’s take a look at how we got here. If we go back to the period in the early 2000s, a cottage industry began to provide and manage several institutions’ overdraft programs. Obviously, this service came with a cost. In fact, that cost became a huge windfall for those firms that were the early adopters. In short, a service that had always existed became a huge profit center for everyone involved. The only people that did not benefit were the consumers. This last point has been disputed by those who benefitted for the last 20-some years.
THAT RISE IN FEES AS WELL AS THE STRUCTURE OF THESE PROGRAMS HAS GROWN TO THE POINT THAT MANY INSTITUTIONS ARE REEVALUATING THEIR POLICY RELATED TO OVERDRAFT.
The concept of allowing a consumer to overdraw their account short-term to ensure payments are not allowed for other services (such as auto and mortgage payments) has merit. These carry high late fees and damage credit for consumers if returned by the bank or credit union. As is the case with many good ideas, a level of greed and quite frankly laziness slowly deteriorates the value of a good idea. This is exactly what has happened but does not have to be the case with overdraft fees. The escalation of fees charged to the consumer for each occurrence rose from the mid-teens at the turn of the century to an average fee today of roughly $35.00.
In short, as this fee became more of a profit center for many, the per occurrence fee continued to inch higher. That rise in fees as well as the structure of these programs has grown to the point that many institutions are reevaluating their policy related to overdraft. This is a result of consumers, regulators, and politicians pushing back on the situation.
The Overdraft Push-Back
The good news is many banks and credit unions have taken the initiative to address the issue on behalf of their customers. As is the case with many issues that impact consumers, the marketplace forces change. Having stated all of the above, let’s explore a simple solution to this issue. We make this recommendation based on working with over 500 banks and credit unions over the past 19 years to assist them in fully disclosing to their customers and members their overdraft policy. This disclosure of the policy related to the service is critical in our estimation and the foundation of a good overdraft program.
A Proactive Solution
Let’s go back for a second and discuss the fee institutions pay vendors to manage their programs. That fee which ranges from mid-teens to as high as 30% of the growth in fee income, basically allowed the institution to outsource the management of their program. So, why did a relatively small percentage of institutions, albeit the number probably exceeds 1,500, elect to do this? The answer is simple, there was a promise of exorbitant increases in fee income and the institutions could rely on technology to manage most of the process. Fortunately for consumers, a large percentage of the institutions elected to keep this core management function in-house.
An overdraft program can be easily managed with existing staff given the decline in branch traffic over the past 20 years. In addition, from a pure customer service and retention standpoint, this should be a person-to-person conversation when dealing with lack of funds. Not a situation where squeezing every last dollar out of a customer is the paramount goal.
So, what’s the final conclusion and solution to this ever-growing issue?
Overdraft fee income has declined significantly since its peak in 2019, as many consumers have been forced to better manage their finances due to the COVID-19 pandemic. Given that fact, why would an institution give away 15 to 30% of this increased revenue stream to a vendor for a service they can provide and manage internally. Here’s the simple solution, manage your program with existing staff, lower your per occurrence fee which history has proven may not reduce income significantly, and fully disclose to your customers and members the value and limits of the service you provide. This is a valuable service for your customer base, but remove the greed and laziness from the equation. The marketplace is requiring this of you as a banker and valued member of your community.
So, let’s be proactive, do the right thing for your customer, and satisfy the consumer, political and regulatory concerns that exist today.
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