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.

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