The final compliance deadline for new overdraft fee rules took effect two weeks ago yet many banks are still working to compel customers to opt in and figuring out ways to deliver new services to supplant lost revenue.
The technology vendor Fiserv Inc. said Monday it is lending its hand to help banks, particularly smaller institutions, on both fronts with its Revenue Expansion program.
The new rules limit the ability of institutions to charge overdraft fees, a major revenue source. Banks stand to lose 50% or more of this revenue as a result of the changes to Regulation E.
"That anticipated revenue drop-off is what prompted us to construct this Revenue Expansion program," George Noga, the senior vice president of revenue enhancement solutions at Fiserv, said in an interview Monday.
The Brookfield, Wis., company's program focuses on three areas: new deposit products, short-term consumer liquidity solutions and loyalty products. They include a mix of marketing services, technology and other products Fiserv has been selling to banks as well as new offerings it is developing.
Examples include online bill-paying services, person-to-person payments, rewards-based checking products and a new service called Relationship Advance, which lets a customer access a small credit line as an alternative to overdraft coverage.
"The things that Fiserv is offering are things that banks should be doing anyway," said Bart Narter, a senior vice president with the market research firm Celent.
Additionally, Fiserv is offering a product called SmarterPay, which enables banks to set overdraft limits for various customer segments based on usage history rather than setting one limit for all customers.
"These are products and services that have been only available to some of the larger financial institutions and not necessarily community banks and credit unions," Noga said, adding that it can be more difficult for smaller banks to use such strategies because of the cost and technology issues.
For example, setting overdraft limits based on account history can be tough for some banks that lack the internal systems to easily segment customer account data.
"I think many of the community banks and credit unions have outsourced their whole overdraft program to third parties, and those programs many times kind of go down the path of having one or two thresholds that are applied to their entire customer base," Noga said. "It's simple, easy to implement, it has some benefits but it doesn't really provide the kind of risk mitigation or flexibility that this type of capability can" provide.
Under the new Regulation E requirements, consumers must elect to receive overdraft protection if their bank charges fees for covering automated teller machine and one-time debit card transactions that exceed their account balance.
The changes went into effect for new customers on July 1 and for existing customers on Aug. 15.
Many large banks determined their strategic response to the changes months before the deadlines. Some smaller banks took a wait-and-see approach, looking at how their larger counterparts were responding first, according to analysts.
The same is true of making product changes and offering new services, Noga said. "I don't think they were or have been that focused on what the alternatives to free checking might be," he said.
For example, Clear Lake Bank and Trust Co. went through the compliance process for Reg E without an outside vendor, according to Matt Ritter, a vice president and cashier for the $234.5 million-asset bank in Clear Lake, Iowa. Its focus has been to educate its customers about the changes and send information asking for them to decide whether to opt in to Clear Lake's overdraft coverage, he said.
"The biggest push with this whole thing was to make sure that consumers are fully educated and they made a decision based on the information we provided," Ritter said.
More than three-quarters of Clear Lake's customers have responded, he said, with the vast majority choosing to opt in for coverage. Such overdraft protection carries a $25 fee when a customer uses it.
Clear Lake has not rolled out new products in response to the changes. "We're obviously always continuing to review our product offerings," Ritter said.
A major thrust for Fiserv is helping banks to zero in on the type of customers to which they should pitch various offerings, Noga said. That's especially important in the context of Reg E, given that a small percentage of customers tend to make up the lion's share of a bank's overdraft revenue.
A May report by Celent found that accounts with more than 10 overdraft transactions per year accounted for 84% of overdraft fees. However, only 9% of accounts fell into that category.
"What Reg E does is make [non-sufficient-fund] transactors less profitable," said Bart Narter, a senior vice president with Celent.
In the report, Narter cited a checking account that Fifth Third Bancorp is offering for $7.50 a month that includes an identity theft protection service as an example of the type of product bundling that could be successful for banks. Such a product appeals to customers who are conscious of their account balances but may not be as profitable to banks, Narter said.