Automatic overdraft-privilege systems are making the tough trick of satisfying customers while increasing fee revenue easier for community banks.
Users and purveyors say computerized systems that automatically determine when to foot the bill for customers who make payments above the amount of their deposited funds has increased revenue, added consistency and cut time spent on daily processing. It also has enabled an intangible but key competitive plus, they say: it's making customers happy.
Saving eligible accountholders the headaches and embarrassment of returned checks or debit-card rejections by automatically covering (and charging) them when they're tapped out allows smaller institutions to readily compete with bigger banks that have had proprietary overdraft systems in place for years.
Banks can trade ad hoc, allowing for manually intensive daily overdraft decision-making for automated convenience. The latest efforts involve setting overdraft limits by integrating applications that measure multiple parameters of customer behavior with community banks' core processing systems, and linking them to point-of-service and ATM networks.
Positive results can come fairly quickly: eight months after implementing an overall courtesy overdraft platform from Fiserv into its "cash advantage" account offering, Baltimore-based 1st Mariner Bank reported an increase of 102 percent in fee revenue, while cutting exception decision-making at branches and returns 40 percent.
Such boosts can often outweigh initial increases in charge-offs when enabling overdraft privileges. The nine percent uptick in chargeoffs per average of net fee income occurring at another Fiserv user, Lake City Bank, after it automated its overdraft program seemed negligible compared to the 58 percent net increase in fees from the system's first year of use. According to Linda Owens, avp of deposit operations at the Warsaw, IN-based bank, there fewer less items to review, less personal kiting, and more positive customer feedback.
Clarksburg Commercial Bank and Metamora State Bank are set to digitize their customer privilege programs, announcing agreements last month to use the proprietary weighting methodology of Profit Technologies' Courtesy Overdraft Processing System, or COPS. The platform uses a set of 19 risk measurements to determine overdraft limits by tailoring policies to individual customer characteristics and account activity. The system electronically gleans accountholder info from a bank's core processing engine, runs the numbers through the chosen parameters to determine overdraft limits, and then feeds the decisions back into the bank's main platform.
Traditional methods often involve branch managers downloading data from the bank's processing system each morning to decide whether to cover a particular customer, which without clear policy or adherence, allows for inconsistent treatment of depositors with similar account characteristics. "COPS gives you the benefit of the risk mitigation by automating the process," says Frank Gigliotti, director of client-management services at Profit. While managers can manually override COPS' parameters, Gigliotti says such actions would have to be documented by the bank.
Regarding specific metrics, accounts with direct deposit and above average daily balances are generally considered good risks and eligible for overdraft programs of larger sizes, while first-time checking or low-balance customers have less leeway to overdraw. COPS also disseminates collection letters to customers with delinquent overdraft accounts and tracks potential charge-off situations, a service offered by rival platforms like those from Carreker, Strunk & Associates, Pinnacle, BSG and EPG.
The vendors are targeting small banks because larger institutions have simply been tapped, Gigliotti says, either through internal development or by working with consultants like Profit, which began developing mainframe solutions for large money-center banks in the 1970s, or rivals like Carreker and the accounting industry's Big Four.
