Ever since the Federal Reserve finalized new rules on how checking account overdrafts must be handled, the banking industry has been pondering worst-case scenarios, and no wonder. An estimated $18 billion to $23 billion in annual fee revenues could be lost if all overdraft transactions affected by Regulation E come to a halt.
Often overlooked in the debate about overdraft coverage is the fact that many customers expect regular access to this service, and their finances will be disrupted if it is suspended altogether.
People will continue to encounter situations where, for example, an emergency payment overtakes the current checking balance, or there's a lack of coordination between householders using debit cards attached to the same account. Working with customers to meet such contingencies may not be the impossible task that many fear.
A recent national survey by Novantas and Informa Research Services indicates that the potential damage from Reg E possibly can be cut in half, given the express desire for continued overdraft coverage among certain customer groups. Successful opt-in campaigns will provide most of this relief, with the remainder achieved through new products that provide improved account information and control.
Though it is widely known that a small minority of account holders incur the overwhelming majority of overdraft fees, there has been a misperception that these customers aren't really aware of what they are doing and would eschew overdrafts if properly alerted to the consequences. More than 90% of the self-identified heavy overdrafters in the Novantas-Informa survey said they were aware of their overdraft behavior and acknowledged their personal responsibility.
Many, for example, said they use overdraft coverage to avoid late-payment penalties on other bills. More than half said the No. 1 reason for overdrafts is that they simply overspend their accounts, and this is seen at all household income levels.
A realistic initial goal for many banks, the survey findings indicate, is to maintain coverage with at least a third of the overdraft-prone customer pool. This can be done by eliciting opt-in participation and by developing new products that will help overdrafters to either avoid or manage balance shortfalls when making debit purchases at the point of sale, and when making payments via automated teller machines.
Success on these terms could be worth $8 billion to $13 billion in fee revenues annually for the entire banking industry. To realize their individual share of this potential upside, however, banks will need to address a series of critical questions.
Targeting. Different approaches will be needed for different groups of checking customers. Customers who seldom overdraft but absolutely want to avoid that possibility, for example, may be receptive to overdraft protection programs, which provide continuous coverage for potential overdrafts with no per-incident fees, in exchange for a small monthly charge. By contrast, many heavy overdrafters can be successfully encouraged to opt for courtesy overdraft, the traditional service that clears overdrafts but levies a fee for each incident.
Pricing. The Novantas-Informa survey confirmed that customers are receptive to innovative ways of paying for services. For example, high-balance customers may be interested in "earning" overdraft protection by using other account arrangements and services. Other creditworthy customers may be receptive to fee-based arrangements that attach a line of credit to their debit cards.
Contact. Thought must be given to the times and places where overdraft-related conversations can best be initiated with customers. Though a third to a half of monthly call center volume can revolve around overdrafts, for example, the very instance when a customer is feeling discomfort may not be the best time to talk about workarounds.
Dialogue. In deciding how to broach customer conversations and portray the value of what will be offered, the institution first needs a solid grasp of the customer's situation; the value of overdraft coverage to that individual; and the potential impact that an offer may have on account use patterns.
Protocol. Items such as overdraft decision logic, account opening logic, waiver/refund policies and banker incentives will need to be re-evaluated so as to balance cost and risk with expectations for new revenue. Decisions will need to be reviewed frequently in light of the changing reality of overdraft for the organization.
Congress is considering further legislation that will affect the terms and price of overdraft coverage, and banks ultimately will have to concern themselves with more than successful responses to Regulation E. However, most of the efforts entailed in coping with Reg E will be useful long term.