No-Overdraft Fee Accounts, No Overdraft Problem
“Overdraft fees should not be ‘gotchas’ when people use their debit cards,” said Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), after the regulatory agency published its most recent report, “Data Point: Checking Account Overdraft.” The study states that most overdraft fees result from debit card purchases for amounts under $24 and are repaid within three days, based on the CFPB’s examination of account and transaction-level data of two million accounts at several large U.S. banks.
This study, combined with others on overdraft fees published by the CFPB in the last year, serves to heighten the challenges banks face in dealing with negative public perception of their overdraft practices. It also suggests the likelihood of additional regulatory action on overdraft fees. Meanwhile, other businesses are targeting bank overdraft practices, as demonstrated by Walmart’s recent announcement of a GoBank account with no overdraft fee.
Banks should respond by offering accounts with no overdraft fees, not even return-check charges, for a fixed monthly fee equivalent to the cost of the average checking account. These should be “return-all” accounts, a simple setting on bank core systems today. Many consumers today would rather have their check items returned and avoid a negative balance and being charged insufficient funds fees. The consumer experience would be the same as “opting out” for debit transactions where all transactions are declined or returned when funds were insufficient. As with Walmart’s new GoBank account, its Bluebird account enables checks to be written with no overdraft fees. Such initiatives, combined with the growth of prepaid cards, demonstrate how marketing “no overdraft fees” is attractive to customers.
While historically bankers have protected consumers from merchant return check fees, more consumers today report they have never paid a merchant with a check in their life. This may seem like a simple idea, but few banks in the country offer this type of checking account. My experience shows such efforts would grow bank revenues, provide positive benefits to customers and align with the goals of the CFPB.
Ability to Pay
Offering this type of checking account would add new profits without risking existing overdraft revenues. As the CFPB’s study points out, 8% of customers incur nearly 75% of all overdraft fees. Nearly all of these customers want their nonsufficient funds (NSF) items covered and are willing to pay for overdraft services. Further, deposit activity, statement balances and other factors provide data that banks can easily use to demonstrate the ability of these customers to pay. One can safely conclude that this 8% will not choose an account that is designed to eliminate overdraft fees.
However, many other bank customers with only a few or no overdrafts find that Regulation E, which details the overdraft “opt in” process, to be confusing. These customers also perceive overdraft fees as a frightening and unfair menace that they cannot afford. Such customers would find a no-overdraft-fee account very attractive. Unable to find it in today’s market, however, they turn to such alternatives as prepaid cards. Offering these customers new checking accounts with monthly fees would add marginal revenue for banks and end the confusion related to Reg E opt-in.
Checking accounts marketed as “no overdraft fees ever” and “return all” can be more easily grasped by consumers. Bankers who worry that merchant return-check fees may anger customers need to be reminded that modern consumers no longer pay online or in-store merchants with checks. The new products will offer a clearer choice for consumers in comparison to prepaid cards and neo banks, as BankSimple and Moven are called, that market that they don’t charge overdraft fees. Consumers may choose to add lines of credit to offer additional liquidity and such an option would be completely under their control.
Finally, by offering such accounts, banks will align with the CFPB’s goals of assuring that consumers only use and pay for overdraft services because they want them, can afford them and clearly understand them. Customers who do not want no-overdraft-fee, return-all services won’t choose them, but will keep their ability to present overdrafts and have them paid with their existing accounts. Banks will be offering clearer and broader choices to the marketplace putting the consumer more in control. Their existing revenues will not be cannibalized because customers who pay the majority of the overdraft fees will continue to choose to have the service and can afford it, even if sometime the fee they pay equals the value of their transaction.
If banks can demonstrate credible and effective success in this process, they will be able to better meet the overdraft objectives of the CFPB, serve customers and the marketplace and better protect their revenues.