How PNC Adapted Its Virtual Wallet to Solve Overdraft Complaints

Innovative new features on its mobile app that give consumers more control could become a model for the industry. But lower overdraft pricing, especially from Walmart with its MoneyCard accounts, could put pressure on PNC's (and other institutions') fee structure.

The summer of 2021 will be remembered for many things, but in financial services it may go down as the year the battle over overdraft fees reached fever pitch.

The heat was both political (Sen. Elizabeth Warren publicly attacking JPMorgan Chase CEO Jamie Dimon over overdraft fees) and competitive (Ally Bank and Alliant Credit union nixing overdraft fees altogether).

Aware of the need for change, planners at PNC began developing an innovative new approach to overdrafts months before the above events occurred. The result was its “Low Cash Mode” set of features within the bank’s popular Virtual Wallet family of transaction accounts. Low Cash Mode was designed to give consumers a self-directed series of remedies to apply before PNC’s overdraft fees kick in. (Virtual Wallet accounts represent about 47% of the bank’s consumer checking accounts.)

PNC completed its nationwide rollout of the features in July, covering approximately 3.7 million accounts, In October it plans to convert about 2 million consumers whose relationships were acquired as part of PNC’s BBVA acquisition. By that point the bank expects around 58% of its consumer checking accounts to have Low Cash Mode coverage.

The Financial Brand checked in with Bonnie Wikert, PNC’s Head of Retail Segments and Deposits, to find out more about the accounts. We also looked at views of the account from consumer and industry experts’ perspectives.

How Low Cash Mode Works and How Consumers Are Using It

Consumers with Virtual Wallet accounts get Low Cash Mode automatically and can’t opt out, though it is up to them to determine if and how to use its features. Consumers who don’t want to be able to overdraw at all have other options, including choices that qualify under the Bank On inter-industry account framework. (That is overseen by the Cities for Financial Empowerment Fund.)

In brief, this is the range of the services that can be accessed through PNC’s app:

  • Accountholders can see what charges are going to hit their account. If a shortfall is indicated, they can change the order in which checks and ACH transactions are processed, in order to avoid overdrafts. Customers can actually choose to return an item for later presentment. (Any penalty for doing so is between the merchant and the consumer.)
  • Real-time alerts enable the customer to know when their balance is low, based on a threshold preset by the customer. (They can opt out of alerts if they so choose.)
  • If the balance is already negative, the service provides at least 24 hours of “extra time” to prevent or address overdrafts before fees are charged. The bank’s mobile app shows a countdown clock for bringing the account balance current.
  • The customer can set up “protecting accounts,” such as a savings account, permitting automatic transfers.
  • Customers can also opt for other ways to restore the balance to at least $0. This includes mobile or branch deposits, transfers from another account besides the protecting accounts, , or reaching out to friends or family for a transfer via Zelle.

If, in spite of these options, someone overdraws, the maximum per day charge is the bank’s pre-existing $36 overdraft fee. Earlier this year the bank said that fees were reduced by over 60% in a pilot.

Wikert says that roughly half of consumers receiving alerts manage to cure negative balances within the extra time provided by the service. She says that although 24 hours of extra time is promised, in actuality it has been averaging 50 hours.

“Our customer research confirms that people do intend to pay their bills when they execute a payment — the utility bill, the cable bill,” says Wikert. “Sometimes they just miss-time the payments, or perhaps they come up short because of unexpected hardship. But, for the most part, the customer preference is to pay the item.”

Wikert says a significant number of consumers have also been using the option to self-return an item that would otherwise trigger an overdraft, but curing the shortfall is more typical.

Using the Zelle option is relatively common among college student accountholders who run short and call on their parents.

Wikert says additional features are under development to enhance Low Cash Mode.

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Consumer and Industry Viewpoints on Low Cash Mode

In a mid-summer review of ways to avoid overdraft fees, Consumer Reports clearly favored the Bank On accounts various institutions have offered, though it mentioned the new PNC features as an option.

“PNC Bank’s Low Cash Mode accounts give customers at least 24 hours to bring up their balances,” the article states. “Otherwise the $36 fee is assessed once a day.”

Thus far little else has been said on financial product review sites about Low Cash Mode. At the time PNC rolled out the new features, it estimated that they would help customers save about $125 million to $150 million in overdraft fees annually.

The bank also stated it hoped Low Cash Mode would help drive account growth as PNC expands its branch network nationally..

The Financial Brand discussed the PNC product and the overall overdraft picture with consultant Michael Moebs of Moebs Services. As part of his practice Moebs consults with banks, credit unions and fintechs on overdraft and related pricing.

Time for an Attitude Shift?

One of Mike Moebs’ key precepts is that the banking industry tends to see overdrawing of accounts as “evil” — his word — an attitude derived from the industry’s classic risk-avoidance, credit-oriented viewpoint. Moebs says this is a dated attitude, based on the conception that an overdraft is an unsecured credit.

In reality, Moebs says, they are clearly not loans. Moreover, he says — and this synchs with Wikert’s comments about PNC’s research — that overdrafts are most commonly the result of consumer error. As such, he thinks the industry should be pricing overdraft charges at a lower level.

In fact, Moebs says there is a school of thought pioneered by Chime, Varo and other neobanks to underprice the competition on overdrafts, or even waive the fees, in order to gain transaction account market share.

Along the way, gaining such volume would bring those institutions more opportunity for overdraft income. But equally important would be their gain of transaction volume which would boost their interchange income.

This strategy favors lower-cost, higher-efficiency players like Ally Bank and Alliant Credit Union. The former never had branches and the latter phased the last of them out during the pandemic. As mentioned above, both announced earlier in 2021 that they were doing away with overdraft charges and Moebs believes they will pick up numerous new accounts. Helping Ally further, he notes, is that they typically refunded overdraft fees so very little revenue ever came from them.

“So Ally Bank can afford to zero the overdraft price,” says Moebs.

Moebs is impressed with the technical accomplishment of PNC’s Low Cash Mode, and the degree of control it puts in the consumer’s hand. In addition, he notes that the public relations value of putting the decisions, even of what to return and what to pay, is strong.

However, Moebs thinks PNC’s $36 charge is simply too high.

In fact, he suggests that if this were only a matter of fee income, halving the fee to $18 “would make a bunch of money” for PNC. It would also draw more new accounts. That said, Moebs thinks PNC’s Low Cash Mode will spawn numerous imitators in the industry.

“Putting more of the decision about overdrafts in the hands of the consumer is smart. Many kudos to PNC for inventing a major change in overdraft processing.”

— Mike Moebs, Moebs Services

But there’s more to the picture.

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‘Walmart Menace’ Isn’t Just About Offering Transaction Accounts

What most bankers and credit union executives have not looked closely enough at, Moebs states, is what Walmart has been doing as it turns its MoneyCard into a full-fledged transaction account. Accounts can be managed digitally or in person at Walmart’s 5,000-plus stores or Green Dot’s over 90,000 retail distribution locations. Accounts can be originated online or using a starter card off the card rack at Walmart stores.

The MoneyCard pricing of overdrafts is important to understand, Moebs advises.

“Always Low Prices”:

At $15, the Walmart MoneyCard overdraft fee comes in at about half of the U.S. median and average of $30.

Moebs says his firm’s research indicates that the all-in cost of an overdraft transaction is $13. The $2 profit that Walmart will earn from its $15 overdraft fee can add up when multiplied by a Walmart-size customer base.

Something else that Walmart has done is explicitly tell consumers what their overdraft limit will be — currently $200. This is something that at least half of traditional providers will not disclose to consumers, Moebs states.

“Walmart’s overdraft design will win over consumers who are heavily transaction oriented with low checking balances,” says Moebs. “The increase in transaction volume will produce more interchange revenue and make Walmart a big winner in fees in the long run.”

Adds Moebs: “Walmart’s marketing muscle, cash and capital will make it a huge competitor nationwide.” And that’s without having its own charter, and with a fintech creation somewhere in the wings.

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Meanwhile, in Washington and Elsewhere…

Of course, overdraft strategy doesn’t function in a vacuum. More attention is being paid to overdrafts by regulators and legislators.

In congressional testimony in August 2021 Acting Comptroller of the Currency Michael Hsu stated that “It is unacceptable for bank customers to get trapped in a cycle of high cost debt. I look forward to seeing greater innovations by banks for programs that can help customers navigate unexpected needs for credit.”

In response to questions, Hsu more specifically said OCC was examining overdraft practices and he also hinted that the effort could become an interagency push.

Meanwhile legislation dealing the overdrafts has been introduced in both the House and Senate, including reintroduction of a pre-existing bill from Senator Warren.

In late August outgoing Gov. Andrew Cuomo signed legislation, effective in January 2022, that would mandate that New York-regulated banks process checks either in the order they are received or from smallest to largest. The aim is to minimize overdraft fees.

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