5 Ideas to Fix the Ugly in Overdraft Fees
Overdraft fees are a prickly subject. Consumers complain about them constantly, and now more than ever, it seems they’re doing so with unregulated vehemence. On the other hand, financial institutions rely on fee income — it’s how they make money on deposits — now more than ever.
Consumers pay an average
of 18-24% on credit cards,
400-500% on payday loans
and 1,000-3,000%
on overdrafts.
– Columbia University
The New York Times reports that financial institutions stand to take in $27 billion in overdraft fees this year alone. The Financial Times puts the number at $38 billion. And this isn’t just a fee stream privy to banks. Credit unions pull in about 25% of the total haul — $6.6 billion in overdraft fees last year — while grumbling about “the regulatory burden” overdraft reforms might entail.
Financial institutions staunchly defend their policies, saying that it is ultimately each person’s responsibility to keep track of their own finances (which it is). But many of the other explanations they offer don’t settle well with consumers. For instance, financial institutions assert that larger items are processed first because those are frequently important items like the mortgage, even though most people know (or at least believe) that by processing the largest items first, a financial institution is more likely to trigger overdraft fees.
One of the more common arguments is that customers prefer their purchases be processed rather than suffer impromptu embarrassments.
Reality Check: Out of 2,023 adults polled, approximately 73% would prefer their bank decline transactions of $5 to $40 if it were to cause an overdraft fee. (Various studies are available as PDF downloads from an online archive.)
If you want to see how consumers feel and what they know about overdraft, just Google it. Or search Twitter. Or YouTube. It’s all over the news. And people aren’t bashful, as this f-word laden query with 391,000 results proves.
So despite all the explanations and rationalizations, financial institutions don’t seem to be fooling anyone. People don’t feel like financial institutions are doing them any favors with today’s overdraft tactics. No matter how many ways financial institutions try to justify it, what consumers are hearing financial institutions say is this: “We know this pisses you off, but we make a lot of money off it. You’re broke. We’re greedy. Too bad.”
Ouch.
Considering how angry people get about overdraft fees, it’s surprising how few financial institutions have attempted to offer any kind of alternative. Yes, overdraft fees may be a balance sheet necessity for financial institutions. But do financial institutions have to be so stereotypically defensive and uncreative?
Assuming overdraft fees are an inescapable reality, at least consider these few ideas (in order of increasing difficulty). Then feel free to suggest your ideas in the comments below.
#1 – Make Overdraft Opt-In
82% of those polled by Opinion Research want to choose whether overdraft protection gets added to their account or not. So why does the financial industry seem to turn a deaf ear, when many companies in other industries would rush to address consumer concerns? Some companies would feel fortunate simply to know what those concerns actually are.
Have you tried to find a checking account without overdraft protection these days? Instead of mandating “complimentary overdraft protection,” why not let consumers make a voluntary choice? Are financial institutions so addicted to overdraft fees that it will take an Act of Congress to make the service optional? Why wait?
#2 – Free Pass(es)
Some financial institutions are offering a free pass — a coupon, of sorts — that gives people one free overdraft. This type of “get-out-of-jail-free” card is becoming increasingly common with Gen-Y and student checking accounts, but why not implement it for everyone on all accounts? If you sent one in the mail to all your existing customers today, you be a P.R. hero tomorrow.
And if you’re going to make overdraft protection mandatory, why not give people one penalty-free opportunity to see how the system works?
Option: You could offer three lifetime overdraft fee passes instead of a single, one-time coupon good for one year.
#3 – Restructure & Reprice
There are options to the standard, flat $35 fee. Bank of America has started charging only $10 if you overdraft by less than $5 (hey, it’s a start). Chase has tiered overdraft fees, with the first one starting at $25 and rising to $35 for the fifth.
Some financial institutions have started capping the number of overdraft transactions that someone can make in a single day. BofA draws the line at ten, but most customers would probably prefer to cap overdrafts at three — no more than five. $300 (or more) in overdraft fees isn’t likely to be appreciated by most customers.
UPDATE: Right as this article was published, a New York Times piece broke a story, “Chase and Bank of America Revise Fee Policies.” From the article:
“Bank of America said it would allow current customers to turn off the ability to spend when their account hits zero, starting Oct. 19. Next June, the bank plans to limit the number of times each year that current customers can overdraw their accounts when using a debit card at a store. It will let new customers choose whether they want overdraft protection when they are opening their account.
“Chase plans to eliminate by the first quarter of next year a common industry practice that enraged many consumers. Instead of lumping a day’s worth of debit card and A.T.M. transactions together and then processing the highest amounts first — a practice that has caused large numbers of consumers to overdraw more quickly and pay more fees — it will credit the transactions chronologically. Chase also plans to allow customers to opt out of overdraft coverage.”
And why not consider going back to the days when overdraft protection was tied to a savings account, credit card or other line of credit? For this kind of service, do you need to charge $35 per transaction? Or can you charge something a little easier for consumers to swallow?
#4 – Balance Alerts
People are less likely to spend more than they have… provided they know how much they have in the first place.
You don’t need to include any sensitive information in balance alerts. Just send a message that says, “This is an automatic alert that you requested to receive whenever your account drops below the amount you specified.” If the person wants to know when they’re below $20, $200 or $2,000, it’s up to them. If your balance alerts include a blurb about being able to “check your balance online,” you should be able to improve online banking adoption rates.
Balance alerts can be delivered with a text message to people’s mobile phones, but they can also be sent by email. Even the good old telephone with a pre-recorded message that simply says (paraphrasing), “FYI, you’re overdrawn.”
At the very least, a financial institution offering “courtesy pay” should attempt some form of courtesy contact by the end of the day.
#5 – Accept/Reject Overdraft Purchases
Why not implement an accept/decline option right at the point-of-sale? “Continuing with this transaction will result in a $XX overdraft fee. Accept/Decline?” The moderate technological challenges with such a solution seem surmountable.
Then it wouldn’t really matter what you charge, nor if people have opted into your overdraft program. The consumer would have the choice. If they think paying $34 in fees for a $4 cup of coffee is worth avoiding shame and embarrassment, they’ll pay it. They may even thank you for it.
Even if you don’t like this idea, just keep in mind that Congress does, along with 85% of America. The other 15% probably doesn’t incur overdraft fees.
This article © 2012 by The Financial Brand and may not be reproduced.
Related Articles From The Financial Brand:
- Overdrafts Pile Up As Opt-In Pays Off, But Were Consumers Misled?
- Kill Unfair Overdraft Calculations Before They Kill You
- More Banks Adopting Simplified Disclosures For Checking Accounts
- Financial Marketers Must Focus On Downward Trend In Overdrafts
UPDATE: Right as this article was published, a New York Times piece broke a story, “Chase and Bank of America Revise Fee Policies.” From the article:
Great points and important to keep in mind otherwise a member might go “rogue”:
http://navyfederalsucks.com/index.php?blog=1&title=overdraft_fees&more=1&c=1&tb=1&pb=1
Here’s another thought: if you’ve identified the members/customers that have a positive relationship (aka profitable) with you as a result of their loans/deposits/shares, how about not charging them at all or giving them more than one free or discounting their fee? My goodness, if you know they’re worth $1000 a year in revenue to your institution, why would you risk that over $25 or $30? Here’s the rub…you’d better know what they’re worth to you.
On #5, what if they present a check (you know, that old-fashioned piece of paper that “promises” the store that it’s good)? BTW – many stores are beginning to NOT accept checks anymore! Woo-hoo!
Great points Mike and Christopher. Overdraft fees seem to be the single biggest hot-button that can set people off. It is frequently the catalyst triggering a switch in financial institutions.
Chuck, I think checks would fall under NSF fees. Financial institutions and retailers alike should do what they can to work together and get paper checks out of the system as much as possible. In this digital day and age, there’s almost no excuse to use/need paper checks.
I actually have the NYT issue today and Chase is running an ad:
“Overdraft? Now Chase puts the choice in your hands.
..We are eliminating overdrafts for debit cards unless the customer opts in for the service….”
Guess I still don’t get it totally. Opting in is great. But who wouldn’t opt in? So, really, are there people out there who would rather the financial institution RETURN their check (unpaid), still charge the NSF fee and then have to then pay the merchant they wrote the check to anothe fee? AND – if it was an electronic payment (debit card or online bill pay service) they would rather the payment NOT be processed, thus making them incur A LATE FEE from the company they are attempting to pay? Really? Wow – frustrating.
People claim they would rather have their purchases and checks rejected, but wait until it happens to them. They’ll quickly change their mind. The embarrassment and inconvenience outweigh the cost.
Additionally, as much grief as we give financial institutions for these fees, how about we give grief to those who habitually abuse the system. A large portion of those complaining are people who can’t and don’t manage their money and have no desire to do so. Additionally, a large portion of those affected by overdraft fees aren’t one-time instances. These are habitual overdrafters.
Lastly, banks have expenses as well. If a check comes in, the bank has to take the time and expense to process the check. Same goes with the processing side of transactions. Regardless of the amount of said transaction, it still takes a human to process these. Where is this person’s salary going to come from?
Manage your money and don’t expect others to manage it for you. We live in a world where we feel things need to be given to us and can’t accept responsibility for our own actions. I’m all for banks continuing to charge overdraft fees.
On a personal level, I agree with you Kasey. I haven’t paid an overdraft fee in 20+ years, and can’t relate to people who do. In large part, I chalk it up to people’s lack of discipline and financial irresponsibility.
The article isn’t written as a reflection of my personal feelings though. It’s written from the perspective of financial marketers. The service may be a necessity — for both consumers and their financial institutions — but I think most would agree the system isn’t perfect? So where is the innovation? It seems financial institutions are reticent to make changes.
Please note: The article in no way suggests banks eliminate overdraft fees. Quite the contrary. The article readily acknowledges overdraft fees are a reality. It is simply suggesting financial marketers might be able to apply some creativity and innovation that could give them a competitive marketing edge.
Overdraft is overdue for an overhaul. I’d prefer to see financial institutions sort it out themselves using free market forces rather than seeing the big hand of Uncle Sam step in… again.
I don’t agree. The fees these banks charge is outrageous. There a quite a few scenerios that can cause an overdraft which may not necessarily be the customers fault. For instance if you are a small business owner and you process credit cards. The merchant bank has free reign over your bank account. So lets say, you process payments, the banks deposit your money in your account but a customer may claim an unautorized charge due to credit card fraud (which by the way is a huge problem). The bank reverses the payment, or fees are being taken out.
Banks have a tendency to put hold on check deposit at their leisure, it happened to me where I deposited a check, I was given a clear date, the date comes around the funds are not available, you call the bank and they advise you that they decided to extend the hold. I can give a bunch of those
The bottomline is that these banks can see things customers don’t. Pretty much the majority of banking industry is done automatically via software that has been programmed to do what it has been told. Bank use the “pending” state as an excuse to move numbers at their leisure. Every business processes batches each night and submits them for payment. so there is no reason for a payment to be in pending for more than a week.
NSF fees make up 40% of their income. So you don’t believe that the programs have been written to favor the banks? Why is it that Bank of America doesn’t allow Branch Managers to reverse NSF fees without approval? I believe that they should be able to charge money for mismanagement of an account but there has to be a cap to when to stop. As long it is viewed as a part of the revenue stream it will never be fair to the consumer because they will manipulate the system so that they can charge fees and a lot of them. Isn’t this what happened to our country in the first place, exploiting people for pretty much all they have? How can we stand for ethics on one end but approve of unethical behavior on another.
Danny, what is it that you don’t agree with? Folks in the financial industry are familiar with the consumer perspective you put forth — not fair, rigged system, etc. Do you have any suggestions that would improve overdraft? What exactly are you proposing?
Please note: While this website welcomes the occasional consumer comment, the primary purpose of TheFinancialBrand.com is to help financial institutions build and manage their brands.
I’ve been told that even if a person opts out of courtesy overdraft pay, that won’t 100% ensure they will be declined. The merchants have different floor limits to what they will decline. Is this correct? Banks or credit unions don’t have control over that.
For example, if a restaurant’s floor is $15 and you buy lunch for $6, it’s still going to clear your account and make you negative. But that’s not your financial institutions fault, we can’t control what their policies are.
How is Bank of American turning off their ability to spend and guranteeing it will work without knowing what the merchants will do?
I have worked in bank marketing for over 25 years, and I have always advocated for the customer. That being said, we do have to make money. Checking accounts are one of the most expensive services a bank can offer and people want them for free. So banks give them away, along with free online banking, free phone banking, and in many cases–free online bill pay. At least at smaller banks, the bank has to pay a hard cost to the vendor based on how many online banking customers they have and $5+ for each customer who uses the online bill pay. So, how are they covering their costs? Through overdraft fees and debit card interchange income. We have to have some way to pay employees, rent, IT costs, etc.
As for “overdraft privilege,” I like the idea of opt-in. If you want it, sign up. My experience is that people don’t want to their items returned because it is embarrassing and pricey (merchants charge more than banks).
At the bank where I worked for 16 years, we paid overdrawn checks in the order they were written–the customer decides which is most important. There are problems with paying largest to small (you addressed) and small to large (no one wants their mortgage/rent or vehicle payment returned). If you pay in check order, the customer decides.
Also, I have always believed in a limit on the number of overdraft fees paid per day. Five is what I have always advocated.
And, the banks where I have worked have ALSO offered overdraft protection from a savings account @ $5 per transfer (combined so one per day you are overdrawn). So, customers could easily choose this option and avoid overdraft fees.
Maybe banks should rethink their options and especially the fee structure of overdraft fees. Don’t look at your direct competitors, look into other markets.
One look on how banking in Europe are dealing with this might prove interesting. While each national market has it’s own practices (usually influenced by a stiffer regulation), apart from the UK customers do not face overdraft fees that high.
E.g. in Germany customer have to pay interest on the overdraft amount. Typical interest rates for this are between 12 and 18%. But the customer only has to pay the interest for the timespan his balance is negative.
So if a customer would overdraft a small amount (e.g. 50 Euros) for a short time (e.g. a week) the overdraft fee amounts to just pennies.
Wiseclerk
Editor
http://www.p2p-banking.com
“Look at other markets.” Wise advice indeed, Mr. Wiseclerk. It really helps to look outside one’s immediate world. It’s also always worth taking a look at how other people have already solved the problem(s) you need to tackle. Thanks for the insight and the comment.