Many of the bank customers responsible for the biggest overdrafts aren't broke. They just happen to be big spenders. Now some banks are trying court them as potentially lucrative customers while at the same time reducing overdraft losses.
Salin Bank and Trust Co. in Indianapolis used to impose static overdraft limits of $500 to $750. In April, it began using technology to analyze customers' income and spending activity and raise or lower their overdraft limits accordingly.
Today, Salin does not permit some of those customers to overdraw their accounts at all. Others are allowed to overspend by as much as $5,000.
"The losses [from overdrafts] have decreased … more so than we expected that they would," says Robin Walker, an executive vice president and the director of administration and retail banking for Salin.
The bank charges $32.50 for each overdraft. Salin was initially attracted to the technology that enables it to implement individualized overdraft limits as a risk-mitigation tool, Walker says.
Salin uses technology from Velocity Solutions Inc. called the Intelligent Limit System. This technology distinguishes which customers overdraw their accounts because they have no money, and should be cut off, from those who overdraw because they are wealthy enough to cover large expenses.
These limits can change from day to day, based on fresh evaluations of customers' income and spending habits. Customers can learn of the limits on their accounts by phoning the bank.
StellarOne Corp. in Charlottesville, Va., began using Velocity's system last month, says senior vice president and retail sales and service executive Michael R. Kane.
StellarOne used to offer static overdraft limits of $750 to $2,000. With Velocity's system, that range is now $0 to $1,500. It has received no customer complaints since it began customizing overdraft limits, but it is too early to tell how it has affected fee revenue and losses, Kane says. StellarOne charges $35 per overdraft.
Varying overdraft limits can be a customer service opportunity, Kane says.
Beforehand, each account had "one limit, one size fits all," he says.
"The people that overdraw their accounts are not the bad clients," Kane says. "They tend to turn around … and they're willing to pay fees."
It is a misconception that the only people who overdraw accounts are broke, says Erik M. Hoghaug, the chief overdraft strategist for Velocity.
"Every economic strata of society has overdrafts," Hoghaug says. "The poor overdraft, but the well-off overdraft too."
Just 1% to 1.5% of accounts have 50 or more overdrafts a year, but they provide 30% of banks' overdraft revenue, Hoghaug says. These tend to be wealthy customers; the poor cannot afford to repay that many overdrafts, Hoghaug says.
"You have such great disposable revenue, an overdraft here or there doesn't matter to you," he says. "I'm not saying people like to pay the fees … [but] these are people who can afford this kind of behavior."
Hoghaug says that without tailoring overdraft limits to each customer, banks are likely to lose 10% of their overdraft income to chargeoffs.
"It's primarily younger people and lower-income [people] who pay the bulk of overdraft fees," says James Van Dyke, the president of Javelin Strategy and Research in Pleasanton, Calif. "That stops being true when you look at the high-volume overdrafters."
People who overdraw their accounts at least 10 times a year can be in any income bracket, including the higher end, he says.
Velocity's system can be used to encourage people to overdraw more by extending their limits, but Van Dyke insists it's not predatory.
"This is different than going after the underserved markets," Van Dyke says. "This company is… targeting a different audience than the justifiably sympathetic … low-income student [and] young adult."
Banks can use this software to support "a good fee-generation strategy," he says.
The people who would receive generous overdraft limits know what they are getting into, he says. They are aware that their behavior is leading them to pay around $30 per incident, but "there's a lot of people that are just sloppy about their financial management," and they are deliberately being sloppy, he says.
"These are people who are consciously choosing to be unconscious with the management of their finances," Van Dyke says.