Vendors and banks are trying toturn compliance with recently revised FDIC guidance on customer overdraft notifications into new revenue opportunities for banks. Overdraft software vendors are aiming their analytics capabilities at detecting excessive users of automated overdraft programs, so banks can both better manage these customers for risks and more easily sell them other fee-based services, as well as comply with the basic tenets of the FDIC rules.
"The changes on the surface to meet the regulatory requirements aren't that significant," says Robert Hunt, senior research director for retail banking at TowerGroup. "But the changes on the backend to try to restructure pricing and minimize lost fees are very significant. It's interesting how the compliance side is driving a whole new set of product pricing changes."
While FDIC's guidance does not apply to the larger, federally chartered banks, many are instituting the suggestions as best practices anyway, says Hank Israel, a partner at New York-based Novantas, which advises the top 50 banks on product pricing and business strategies. That's because the big banks are betting that the Consumer Financial Protection Bureau, after it launches July 21, will take up FDIC's overdraft mantle to cover the rest of the industry. FDIC-regulated banks must have their overdraft policies in place by July 1.
Finding, Alerting Excessive Overdraft Users
A list of frequently asked questions FDIC released last month to supplement final overdraft guidance the regulator issued in November say community or state-chartered banks should notify any customer who has incurred more than six overdraft fees in a 12-month period - an amount the regulator deems "excessive" - of what "may be lower-cost or more appropriate alternatives." The total fee counts should include daily fees for outstanding overdraft status, as well as per-transaction overdraft fees, so systems will have to be coded thusly. It had been unclear prior whether daily outstanding overdraft fees should factor into the total count, says Mark Groves, director of consulting analytics at Austin, Texas-based Sheshunoff Consulting + Solutions.
Analytics pinpoint banks' big overdraft users. Then the systems can be configured to automatically alert these users to fee-based alternatives to overdraft coverage, such as mobile funds transfers or direct deposit advances - exactly like FDIC says the banks it oversees should. Alerts can be sent as emails, texts, periodic statements, online messages, letters or phone calls, depending on the system chosen.
Sheshunoff's automated Deposit Score overdraft program, for instance, now automatically generates letters and "to-call" lists triggered by a customer's seventh overdraft fee. The product, which focuses on overdraft tracking, will also record whether or not customers want to stay in an overdraft program, and manages preferred mode of contact. "If the client says 'please quit calling me,' we can capture that," Groves says. While Deposit Score lacks automated customer contacts - emails or calls to customers require a manual, follow-on step - "generating an email would be potentially possible based on the letter generation process. Our system doesn't do that because it is designed to alert the bank, not the customer, to the situation," Groves says.
Other automated overdraft programs, including that of Pinnacle Financial Strategies, do not provide call list and letter generation, because some core providers "such as Jack Henry and Fiserv, may also offer the ability to automate the generation of customer letters through the core platform," says Kelly Anderson, Pinnacle's director of marketing.
Analytics = New Products, New Pricing
A silver lining in the new overdraft rules is that they leave room for banks to personalize overdraft program pricing according to customer type. "I don't know how much you can change customer patterns," Hunt says, "but with analytics you can price according to them." And customers that keep large, continuous balances can be rewarded with free protection on the rare occasions they overdraw their accounts, Hunt adds.
Tools like Minneapolis-based FICO's Predictive Analytics, Revenue Management, and Decision Optimization and Strategy Design are getting noticed amid the overdrafts hubbub because they're aimed at better segmenting customers by tracking their behavior and transaction patterns, so banks can better price and sell them overdraft and other services.
The Bank of Stockton in Stockton, Calif. ($1.9 billion in assets), is using ClairMail's mobile messaging to notify bank customers of low balances and overdrafts, so they can choose to transfer money from savings accounts to cover any shortfalls. And ASP availability for Brookfield, Wis.-based Fiserv's deposit lending product, Relationship Advance, which covers overdrafts by debiting money from a customer's next electronic deposit, was announced in October.
"The smaller community banks are definitely going to be looking more for the software-as-a-service-type solutions for overdraft," said Nancy Atkinson, senior analyst at Aite Group. And solutions that apply a compliance layer, Hunt says, but can also drive or recoup fee revenues, are most in demand.
Novantas has worked with "a number of clients in building logic to automatically shut down overdraft protection to any customer getting ready to charge off," Israel says. Such "automatic shutdowns will come over time to the smaller banks," he adds. FDIC guidance suggests monitoring overdraft programs, which carry certain charge-off risks, so they neither harm consumers nor threaten the financial safety and soundness of banks.
Disclosing Overdraft Limits
While overdraft limits can remain undisclosed, some firms have moved toward a more disclosed model, interpreting language in FDIC guidance as emphasizing such transparency. Sheshunoff is currently working on a hybrid version of Deposit Score that would make changes to customers' overdraft limits less frequently than daily. So banks, if they choose, can report limits to customers less expensively more easily by doing it periodically. Deposit Score uses algorithms to set and change max overdraft limits for each customer based on deposit and transaction histories from prior days.
Fluctuating overdraft limit programs "have hid behind a data processing algorithm to generate fee income for the bank," contends Mike Sobba, Strunk & Associates' president and CEO. Sheshunoff's Grove counters that prior overdraft regulation resulted from inappropriate marketing of disclosed and fixed overdraft limits. "We think periodic limit change notification is more flexible than just having a plan of $500 out there," he says.
