MidSouth Bank Puts in Overtime in Overdraft Protection

While the rest of the banking industry is clinging to fee income, MidSouth Bank is working with customers to reduce it.

The counterintuitive move is part of what the Lafayette, La., bank calls an ombudsman program, where bank employees help customers avoid excessive overdrafts. One of the first of its kind, the initiative could serve as a model for banks preparing for guidance from the Federal Deposit Insurance Corp. that encourages them to counsel consumers on overdrafts — though in this case the innovating bank isn't even regulated by the FDIC; MidSouth answers to the Office of the Comptroller of the Currency.

"This is nothing new to us," Rusty Cloutier, MidSouth's president and chief executive officer, said Friday. "We did this during Hurricanes Katrina and Rita. We stepped up and reached out to our customers and did things that a lot of people would consider way beyond what we should have done. But that's what we're here for."

Many banks have argued that counseling customers on the most reasonable and appropriate product is not their responsibility. The FDIC guidance, adopted in November, expects banks to take "meaningful and effective action" to limit the use of overdraft programs to access short-term credit.

This action might include monitoring accounts, contacting habitual users — those who overdraw more than six times in a rolling 12-month period — and helping them choose a less costly alternative. The FDIC expects the more than 4,600 banks it supervises to set daily caps on overdraft fees, waive fees for transactions under a certain dollar amount and not process transactions in a manner designed to maximize fees.

"If you have a customer that is using this product five, 10, 15 times in a year, then 'relationship banking' would say you definitely want to make sure that you reach out to that customer," said Mark Pearce, the FDIC's director of depositor and consumer protection.

Banks, he said, should also make sure "they're making an informed decision about the product, and if there are alternatives that might be better suited for the customer, that you help your customer by offering those better products."

MidSouth has designated two employees as "account analysis counselors" to take calls on a hot line, monitor accounts and get in touch with those having trouble with excessive overdrafts, or even with loans and credit cards.

"They really work directly for the customers," Cloutier said. "Their job is to mitigate the customers' problems. And if we have made a mistake or charged them overdraft fees that they shouldn't be paying, those ombudsmen have the ability to rewrite those terms and to work with the customer."

Cloutier, a former chairman of the Independent Community Bankers of America, said he doesn't think MidSouth is doing anything different than most community banks; it's simply formalized the process. And he has no illusions that the program will help every customer.

"I'm not going to tell you that everything works out hunky-dory on every case," Cloutier said. Still, observers said it could foster good will with customers.

Steven Reider, the president of Bancography, a Birmingham, Ala., bank consulting firm, said the program shows customers that the bank is more than just a vendor — it's an advocate and adviser. MidSouth is validating customers by addressing their concerns, building loyalty in the process, he said.

"By placing themselves in that trusted-adviser position, you're getting exactly at the heart of what a bank should be doing with customers," Reider said.

Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP, said banks often assume every customer can manage their finances, but that's not the case. Helping them is smart from a human standpoint, as well as a business one, he said.

"There's a whole group of banks, they probably would never say this, but would be thinking, 'We don't mind the customers overdrawing because it's a revenue source for us,' " Fitzgibbon said. But "it's a good thing if long-term, you're helping your customers manage their affairs in a more fiscally disciplined approach."

Critics of the guidance have said developing that type of program might be cost-prohibitive for some banks.

They have said the guidance is unclear, a problem heightened by the fact that it reads more like a requirement than a recommendation, said Elizabeth Eurgubian, regulatory counsel at the ICBA.

"It's written in such a way that these aren't hard-and-fast requirements that are easy for a bank to figure out and comply with," Eurgubian said.

Yet at the same time, she said, "it's written in a way that's more like guidance, but is it going to be enforced like it's a requirement … [and] how do you comply with it?"

Philip Smith, the president of Gerrish McCreary Smith, a consulting and law firm in Memphis, Tenn., said many of his clients feel that the guidance, along with other recent consumer compliance-related regulations, has gone too far. He said many of them have yet to develop their own programs. "I think MidSouth is probably doing the right thing, which is getting way ahead of the curve," he said. "They're the leader in this. But I know that there are still some banks that are somewhat rebelling against this idea, because they have to be their brother's keeper on that; they have to be the consumers' advocate."