Overdraft elephants are hiding in plain sight in bank and credit union boardrooms. No one admits seeing them. No one talks about them. The less said the better.
As one bank CEO put it when asked about the large animal, "I don’t want to have any discussion or communication about overdraft fees." Or as another said as he had to squeeze by the behemoth to a meeting of the board financial committee, "My biggest fear is that they will actually start growing and attract unwarranted attention. I want it known it was certainly not because of anything we did."
For most, overdraft fee represent the single largest source of revenues a financial institution receives from its checking accounts. FDIC data shows that service charge revenue through the first six months of 2010 (before Reg. E) for banks $200 million to $20 billion in assets was essentially unchanged for the first six months of 2011. And this is true despite the decrease in consumer spending during the recession and the reality that most of the financial institutions in this segment still retain "free" checking.
These big elephants are critical to a segment of consumers who value them greatly, opt-in for these services, and will find them elsewhere if financial industry herds disappear.
Some financial institutions are beginning to acknowledge the elephant, for both the good he does and the bad. Actually, when the light is brightly shown on the creature valued highly by some consumers, it turns out the animal isn't an elephant at all; it is just an overdraft peccadillo.
How did it get blown up in size and image? Regulators and consumer advocates do not have a clear vision. They have published articles and ugly stories about the overdraft pachyderm squashing innocent and defenseless consumers. They have drafted regulations placing themselves in the role of big game hunters with pictures of themselves standing over some in the herd brought down with powerful weapons such as fines and penalties. These big game hunting stories have created fear among all herds, large and small. But now even the regulated hunting of overdraft elephants is getting confusing. Despite strict requirements to limit the herd size with Reg. E opt-in requirements, many herds thrive at the consumer's choice. And regulatory efforts to make them extinct such as proposing that financial institutions must close consumer accounts with "excessive use" have rightly been acknowledged as overreaching. So now the hunters, consumers and financial institutions face a highly ambiguous situation of which herds and animals to thin. Some are challenged while others are left to live in peace.
Some select law firms have found a great tort case with by taking advantage of the animal's unwieldy size and appearance. They are successfully extracting settlements from some financial institutions, raising the cost of harboring the elephants.
Politicians have responded by trying to shift consumers to kinder, gentler animals that can provide the same service. For example Paypal's "BillFloat" charges only 3% interest for a 30-day loan to pay a single bill. But when examined we find, well, they look just like overdraft elephants charging up to $19.95 in a fee to pay the bill and an additional $10 if the funds are not available in 30 days. These animals are just like the overdraft elephant but now they are thriving in non-banks. Is that the goal? Are politicians and regulators only concerned if these herds exist in financial institutions?
We are suggesting that we all acknowledge the elephant in the room for what it is, a "peccadillo." We allow the industry to foster these much more amiable peccadilloes as a fair service desired and wanted by certain market segments. Yes, it is better not to have to spend money you don’t have, not drink, not smoke, and attend church every Sunday. But humans live and acknowledge some behaviors as peccadilloes and only a few as mortal sins. And we need to manage this herd successfully, not simply move it to another industry.
This is the reality in the plain light of day, but political opponents would be loathe to relinquish their high-minded role of protecting the low to moderate-income households from overdraft elephants.
Of course, sitting next to them in the halls of government is the Lottery Elephant, a hugely regressive animal that takes six times more from low to moderate income households every year than overdraft fees for no value in return. With this in plain sight, some might argue that their priorities are out of line.
But lottery revenues go to governments. The less said the better.
Bob Giltner is Chief DDA Strategist for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of profit strategies and overdraft management tools.