Banks, Vendors Scramble to Update Overdraft Systems

With the first deadline of the Federal Reserve's new overdraft fee requirements just two weeks away, banks and technology vendors are hurriedly updating the systems they will need to keep track of consumers who have opted in for coverage.

A significant number of banks, especially small ones, will be caught unprepared when the rules kick in July 1, vendors say. And others will be forced to leave some revenue on the table because their systems won't be able to identify some payments that can still incur fees.

"I think a lot of community banks, quite honestly, have maybe been putting off the inevitable," said Mark Flamme, a director leading the Midwest banking practice for West Monroe Partners, a consulting firm. "Now that the regulation is here, the potential income losses are real. I think we're going to see institutions really kind of scrambling."

Under the changes to Regulation E, consumers must elect to receive overdraft protection if a bank plans to charge fees for covering automated teller machine and one-time debit card transactions that exceed the balance in a customer's account.

"We would estimate in an average bank, up to 40% of that overdraft revenue is at risk" because it is associated with point of sale and ATM channels, said Dan Shannon, the senior vice president and general manager of consulting services at the Jacksonville, Fla., core vendor Fidelity National Information Services Inc.

Much of the work core vendors have undertaken in response to Reg E has centered around adding new data fields to banks' core systems. Not only can this indicate whether a customer has elected for overdraft protection, but banks can also use the information to fine-tune their marketing efforts — for example, by promoting overdraft protection to people who have used the service in the past but have not opted in now.

Banks have been notifying their customers of the changes through direct mailings, online messages and telephone calls in an effort to get people to opt in. The rules also mandate that banks send customers who opt in for the coverage a confirmation message to ensure their decision was intentional.

Open Solutions Inc., a core vendor that works with small and mid size banks, began notifying clients in February of their ability to add temporary input fields to its core programs to track customer responses, said Sue Pinsonneault, a product manager for retail delivery.

In May the company began delivering a permanent system update to clients that worked off the data they had inputted in the temporary fields created with their customer records, she said.

"We provided that opt-in field, we produce reports when that field is changed, and based on when that field is changed, we will generate a customizable notice that the institution sends to the consumer to confirm that they had opted in," Pinsonneault said. "We can identify the source of the overdraft and go out and look at whether the person has opted in."

Even for banks that did start their compliance efforts early, there are still technical issues that are not likely to be resolved before the rules take effect for new customers July 1 and existing customers Aug. 15.

For example, the rules do not cover recurring debit payments, such as an automatic utility bill payment tied to a consumer's debit card, which means banks can still assess fees for covering overdrafts that result from such transactions regardless of whether has customer opted in for protection.

However, discerning between one-time and recurring debit payments is difficult because that information often is not included in transaction data.

Core system providers say most payments networks do not pass along this data currently. An exception is the Star debit network, which "has mandated for several years that acquirers must include a 'recurring' transaction indicator," a spokeswoman for First Data Corp., which operates the network, said in by e-mail.

Banks that use Star "are therefore able to identify any Star transaction that the consumer has set up on a recurring basis."

Historically, debit transactions "were grouped together because there was no reason to have them separated," said Dennis Gorges, the director of internal audit and compliance for Jack Henry & Associates Inc.

Coding for recurring versus nonrecurring debit card payments is "kind of a huge deal because all the switches … also have to make changes," Gorges said. "We have to be certified with those switches right now."

Jack Henry and its competitors say their customer accounting programs are ready to track customers that have opted in to overdraft protection and determine when a fee can and cannot be assessed. However, there is little they can do to distinguish between recurring and nonrecurring payments until those details are incorporated into the data that is delivered to banks.

"I believe it will ultimately all be resolved but no, I do not believe it will be resolved by July 1," said Pam Phillips, the product manager for the PhoenixEFE core system sold by Harland Financial Solutions Inc. in Lake Mary, Fla.

"There is a possibility there could be a loss of fee income that could have been collected that wasn't" from recurring debit card payments, she said.

Though an important issue, it is not likely to have a huge financial impact, since most debit transactions are one-time.

Kevin Gregoire, the chief operating officer of card services at Fiserv Inc., estimated that about 2.5% of debit card transactions are recurring.

Still, Fiserv has made changes to its systems to address that aspect of the regulation.

"We've enhanced our systems so that provided the transaction includes a recurring payment indicator, we can capture that recurring payment indicator and use it both at the point of authorization as well as at the point of settlement," Gregoire said.

That capability is dependent, though, on electronic funds transfer processors providing such an indicator.

"The problem is you've got to talk with kazillions of different networks to figure out if it's recurring or nonrecurring," said Bart Narter, a senior analyst with the Boston research firm Celent.