Rick Barham May 18, 2015

Time to simplify overdraft fees

It’s time to simplify overdraft (OD) fees. Better yet, it’s time for banks and credit unions to completely rethink their overdraft fee strategy to simplify terms for customers and address the concerns of the Consumer Financial Protection Board (CFPB), which is scheduled to issue new rules in July.

OD fees are increasingly unpopular and very complex. Here are some basic definitions of overdraft products: 

  • Overdraft protection: FI sweeps funds from an alternative deposit account (such as checking or savings) or via credit facility (generally a line of credit or a credit card) to cover a shortfall.
  •  Overdraft forgiveness (sometimes called “overdraft courtesy,” “overdraft privilege,” or “bounce protection”): FI offer customers a “grace” amount to overdraw the account.  They will still be charged an overdraft fee, but the customer’s check/ATM/debit/bill pay/etc. will be paid, and funds are swept and nonsufficient funds (NSF) charges apply. This applies to both checks and debit transactions.
  •  No protection (sometimes called “return all”): FI rejects a check when an overdraft is attempted by the customer, who still faces a “returned item fee” or NSF. Debit cards are typically denied under this plan.

Customers find these service options conflicting, confusing, and punitive. Here’s one typical comment by one Consumer Watchdog columnist writing for the Times Leader in Wilkes-Barre, Penn.: “Some banks call it debit-card overdraft ‘protection.’ Others call it ‘coverage.’ Either way, it’s a misnomer if I’ve ever heard one. What it really means is that if you ‘opt in’ to this racket and then overdraw your account using your debit card, the bank will slam you with a fee that’s typically about 35 bucks. On the other hand, if you incur an overdraft with your debit card and have not signed up for ‘protection’ or ‘coverage,’ the bank charges no fee at all.”

Meanwhile, the CFPB confirmed in January that overdraft protection fees will be an agenda item that the agency plans to address in July. When a regulatory body has a product or service in its sights, we often look to our data to see if business practices shift ahead of expected policy decisions. So, what’s changed with OD fees? Our internal databases based on a sampling of 500 plus banks and credit unions show the following:

For the period of January 2015 to March 2015, the “differences” between what banks charge and what credit unions charge for OD and NSF fees remained consistent throughout the time at about 10% and 12% respectively. OD protection fees did exhibit much larger swings, with differences throughout the time period narrowing from 61% to 56%, with banks lowering OD protection fees, and credit unions raising theirs. These differences can be explained by credit unions starting from a significantly lower point than banks, a renewed attention to banking competition at the start of the year, or perhaps recognition of the CFPB July agenda item.

At a more granular level, NSF fees for banks started at $31.50 on average in January and for credit unions at $28.50. Banks’ NSF fees drifted down to $31.37 on average in March while credit unions moved down to $28.48.  For OD fees, in January banks started at $31.80 on average dropping to $31.76 in March while credit unions started at $28.26 and moved up only fractionally to $28.27 in March. For OD protection fees, banks started at $6.49 on average in January and credit unions at $4.02 (again, a difference of 61% versus March of 56%). Banks drifted down on OD protection fees in March to $6.47 on average and credit unions moved up to $4.14.

What this all shows is that it’s business as usual! The CFPB ruling has been anticipated for some time and yet there has been no real change in the industry’s approach to OD fees. There has been no real effort to assuage the CFPB or give customers a more palatable alternative with a new OD model. It’s time to look outside the banking industry for a fresh approach to the OD fees problem. Other industries have faced similar challenges and came up with innovative new solutions.

In the telecommunications market, for example, competing cellular carriers were offering complex service packages that left customers confused about roaming charges, data usage, friends-and-family plans, rollover minutes, equipment fees and unexpected service fees. So many variables and hidden fees made shopping for the right service difficult. T-Mobile changed that with the introduction of a simple, “all-you-can-eat” plan that treats all transactions as “data” with limits. Rather than hiding fees, they created a simple plan with no contracts and made it easy-to-understand. As a result, the company closed the fourth quarter of 2014 with an additional 2.1 million subscribers, a total of 52.9 million, making T-Mobile a looming threat to larger carriers.

When you look back at the basic overdraft definitions cited above, it seems that complexity comes from a “baklava of legacy services” that have been progressively added over many years. Today, most of these services are little understood or appreciated by consumers. Just as mobile is finally looking at everything they offer as “data,” we hope that there’s a financial institution out there that will step forward with a new model of OD fee simplicity. And by that, we mean offering programs that are permission-based/opt-in, covering all transactions and not just some and only under certain conditions. We also think that the next 90 days would be the perfect time to release such a simple, all-in-one service plan that will appeal to regulators and consumers alike.

Mr. Barham is CEO and founder of San Anselmo, Calif.-based Market Rates Insight, which provides competitive pricing intelligence for deposits, loans, and fees to financial institutions nationwide. He can be reached at Rick.Barham@MarketRatesInsight.com

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