Part 2: Death to Overdraft Fees? Not Quite.

 

 
 
 
 
 
 
 
 

 Overdraft part 2 blog header

June 01, 2022 | By Allied Solutions   

When a transaction exceeds the amount in the consumer’s account, financial institutions can allow the transaction to go through for a fee, called an overdraft fee. The average overdraft fee is about $35. Overdraft fees are sometimes confused for Non-Sufficient Funds (NSF) fees, which are fees related to the clearance of paper checks. Some institutions choose to charge overdrafts daily, while others charge per overdrawn transaction. Many consumers are flustered to see an overdraft fee on their statement, yet these fees are considered the cost of short term credit. Overdraft fees have been long-standing in the banking industry, however, since the pandemic, many financial institutions have made changes to their overdraft programs, with many mega banks eliminating them.

Death to Overdraft?
If overdraft fees go away completely this will present some challenges to individual financial institutions and the industry as a whole. Some challenges include:

  • Consumer Financial Instability
    It’s no shock that the pandemic shook up consumer finances, in many ways that are yet to be realized. Financial institutions must continue to balance revenue growth with consumer sensitivity. Eliminating overdraft programs could actually be financially harmful to those who rely on it and don’t have access to other credit options or would otherwise turn to less regulated credit options.  
  • Loss of Revenue
    Aggregate overdraft revenue for financial institutions in 2020 was $8 billion, down from $12 billion in 2019 (PDF download). Overdraft fees are a significant stream of revenue for financial institutions and removing them will result in a loss of revenue. Financial institutions must consider how they would make up the lost profit by eliminating overdraft programs. 
  • Staying Competitive: Fintechs are leading the trend to drop overdraft fees, while some national banks are offering a safety margin, meaning if an account is overdrawn under a set amount an overdraft fee will not be applied. While marketing campaigns may make it seem as though these fintechs and banks are doing away with overdraft fees all together, many are just altering their programs to be more gracious. It’s important for financial institutions to take a closer look at what the competition is offering in order to remain truly competitive. 

 


Death to Overdraft Fees? Not Quite. Read the first blog in our series here.


 

Banking Done Differently
The pandemic has changed the banking industry in many ways. One significant consumer expectation that has grown since 2020: Consumers expect their banking institution to support them during financial hardship. 

Here are 5 ways you can maintain overdraft fees while supporting your accountholders:

1) Analyze transactional data
Transactional activity (primarily debit card usage)  is a reliable barometer of accountholder engagement. Typically, only 15-25% of accountholders are highly engaged with their financial institution. Since activity is a precursor to a strong relationship and longer account life cycle, taking a closer look at transactional data can identify dormant or less active accounts for the purpose of re-engaging these accountholders. Automated solutions can segment accountholders to receive custom communications and provide strong financial literacy and cross-sell opportunities, driving profit that is not tied to overdraft fees.

2) Increase non-interest income generating solutions 
Low interest rates are causing executives to look to non-interest opportunities for income. Non-interest income can help margin compressions and address liquidity concerns. Maintaining accountholder satisfaction while generating non-interest revenue is a priority and can be made possible through reward programs. Accountholder reward programs can not only increase satisfaction and loyalty but can also help grow non-interest income. One such reward program (PDF download) allows members who opt in to transfer checking funds to digital merchant cards that can be used for both online and in-store shopping. Reward cards can include perks like cash back and be awarded to consumers who open a new line of credit or account with your financial institution.

3) Educate accountholders
Accountholders may not be aware that they have overdraft protection available to them. This is most times offered at account opening and never again in the account lifecycle. Consider an educational campaign to help accountholders become aware of their options when it comes to their checking account and overdraft protection. 
Because free isn’t always best, helping consumers understand the benefit they receive from overdraft protection can allow your institution’s overdraft program to thrive.

4) Consider implementing margins
While many mega banks tout that they are eliminating overdraft fees, the fine print reveals that they are simply removing them for low-dollar transactions. Implementing safeguards can modernize overdraft programs without doing away with them. One such safeguard could be using transaction history to identify heavy and light users of overdraft protection. Once these accountholders are identified, overdraft protection could be reduced for light users. Another safeguard could be scaling the amount of the overdraft fee with the amount of the transaction (e.g. higher transactions receive higher overdraft fees and lower transactions receive lower overdraft fees) or offer personalized overdraft thresholds based on an accountholder’s risk profile.  
Rather than doing away with an overdraft program completely, consider how your institution can minimize fees without removing them. This can also create a cross-sell opportunity to heavy users for small dollar lending products.

5) Invest in overdraft protection
Maintaining but modifying overdraft fees can help financial institutions remain competitive while supporting accountholders. Partnerships with industry leaders can support these efforts. A third-party provider of overdraft protection can offer a turnkey solution that manages accountholder communications, offers strategies for improvement, and can be easily pivoted to modify an overdraft program as needed.

 


Download our free ebook for more ways to strategically expand non-interest income.

 

Despite trends of overdraft elimination, overdraft programs continue to provide short-term credit for accountholders who overdraw their checking accounts. Digging into transactional data and leveraging accountholder relationships can help to educate accountholders on the differences between overdraft fees and overdraft protection and aid them in becoming more financially literate. Third-party solutions, such as reward cards or overdraft protection, from trusted vendors can enhance overdraft programs and allow for modifications rather than elimination. With overdraft fees creating a significant stream of revenue, financial institutions should strongly reconsider how to modify overdraft programs, without doing away with overdraft fees altogether. 

 

About Allied Solutions

Allied Solutions, LLC is one of the largest providers of insurance, lending, and marketing products to financial institutions in the US. Allied Solutions uses technology-based products and services customized to meet the needs of over 4,000 banks and credit unions, along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions maintains several offices strategically located across the country and is a subsidiary of Securian Financial Group, Inc.

 



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Content in the blog posts are the opinion and views of the writer, and don't necessarily reflect the opinions or views of Allied Solutions.

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