Teche Bank in Franklin, La., is way ahead of many others in preparing for the new rules on overdraft fees.
Back in February, the $760 million-asset bank mailed customers its first notice, discussing how they would have to opt in to continue receiving overdraft coverage on debit-card and ATM transactions, a service for which it charges $26.25.
Several weeks later, employees started chatting with everyone who walked in about the upcoming change. "That is the key to the whole thing-the teller staff," says Ross Little Jr., the chief retail officer.
The result of Teche's diligence: Of its 30,000 customers with debit cards, 86 percent have responded to the overdraft offer. And of those who responded, nearly all—96 percent—have opted in.
With the majority of the responses, the bank asked in person or by phone, Little says.
The Fed's new overdraft rule is an amendment to the Electronic Funds Transfer Act, or Regulation E. It requires new customers to opt in by July 1 if they want overdraft coverage; existing customers must opt in by Aug. 15. Banks are concerned that, if the opt-in rate is low, they could lose millions of dollars in fee income and alienate customers by declining transactions that they currently let go through.
Teche's simple marketing strategy of contacting customers early and often, with an emphasis on communicating face to face-whether at the teller line, new accounts desk or anywhere else-is so effective that others, like Green Bank in Greenville, Tenn., sought its advice when starting their own program.
Targeting customers who use overdraft the most is another useful tactic, says Alan Friesen, president and chief executive at the consulting firm Haberfeld Associates, which works with Teche and Green. "You're really winnowing down your customer base. Half of your overdraft revenue is going to be driven by about 3.5 percent of them."
Friesen says high opt-in rates are achievable because the vast majority of customers who never incur an overdraft fee don't mind agreeing to the service, just in case, and the rest generally appreciate having it.
The $2.7 billion-asset Green has between $8 million and $10 million of revenue at risk if customers don't opt in, says Frank Snyder, senior vice president and retail bank manager. The bank started its outreach in April. "We've worked hard at scripting and trainings. All of the bank employees need to know and understand Reg E. It's very confusing."
So far Green, which charges $31.95 for paid overdrafts on debit and ATM transactions, has contacted 41 percent of its 94,000 checking account holders; 93.7 percent have opted in. Green also began sending mailers and a newsletter in May.
Moebs Services, a consulting firm that tracks industry statistics, says debit card and ATM overdrafts accounted for $19.4 billion of the $37.1 billion in total insufficient funds and overdraft fee income in 2009. Michael Moebs, the firm's CEO, expects a relatively small drop in total overdraft fee income for 2010—he projects it at $35 billion—and sees it rebounding to $40 billion in 2011.
His bullish outlook is fueled in part by the fact that the heaviest users of overdraft already seem eager to opt in. Moebs defines heavy overdraft users as those with more than 10 overdrafts a year. These customers comprise 6 percent to 9 percent of the nation's 130 million checking account holders.
Perhaps counterintuitively, banks that choose to lower overdraft fees will come out ahead of those who raise them, Moebs says. "We have one client who last year dropped their overdraft price from $24 to $12. They had a 16 percent increase in revenue for the year and they just started it at Labor Day." Two other institutions showed similar results after lowering their fees.
One reason for this is that lower fees make banks more competitive with payday lenders. Moebs says the median price per overdraft at banks and credit unions nationwide is $27, while payday lenders charge an average of $17.25 for a $100 cash advance.
Still, convincing banks to lower overdraft fees could be a tough sell. In a March survey, 57 percent of banks and credit unions told Moebs they intend to raise their fees in response to Reg E changes; only 18 percent said they would lower their fees.
Fee hikes reflect "a very traditional viewpoint" in the industry, Moebs says. "They believe in overdraft as a penalty; they do not view it as a benefit."
