Nine out of 10 Americans have a checking account, making it the most widely used financial services product in the United States. Overdraft programs, which provide a safety net for debit card transactions when checking account balances run low, represent a significant source of bank revenue – upwards of $32 billion in fee revenue during 2012 alone.
Since the tumultuous financial crisis, a few retail banks have modified their overdraft policies. Some institutions have required customers to opt in to overdrafts, denying a debit card transaction when there are insufficient funds. Yet there is still confusion with how overdraft protection products work.
According to a recent report by Pew Charitable Trusts, many consumers express disapproval about banks’ overdraft policies, including questionable marketing practices and a lack of clarity around fees.
The problem: Overdraft products by the numbers
- 10 percent of Americans paid at least one overdraft penalty in 2013, and another 5 percent paid an overdraft transfer fee.
- Regulation E requires that financial institutions obtain consent from customers prior to enrollment, but 52 percent of customers who incurred a debit card overdraft in 2013 were either unaware that their bank offered overdraft coverage or discovered the penalty only after they had overdrawn their account.
- On average, an overdraft penalty (and additional related fees) costs a consumer a total of $69, with the majority of overdrafters paying three or more overdraft fees per year.
- 84 percent were not proactively warned by their bank or credit union that a transaction would overdraw their account.
- 68 percent would prefer that a transaction be declined instead of being charged a $35 overdraft charge.
Source: Pew Charitable Trusts, June 2014
So what can banks and credit unions do to help make overdraft policies more clear and improve the customer experience while maintaining profitability?
Education. Start by educating account holders on overdraft products with clear pricing information before they sign up for a checking account or an overdraft protection service. It’s a regulatory requirement, but it’s also good business.
Proactive notifications. Consider imminent fee alerts, via text message or email, for transactions that would trigger an overdraft charge. Online and ATM transactions could also include an on-screen alert prior to completing the transaction.
Product design. Banks can design checking accounts with overdraft features that align to a customer’s unique needs. These features can be combined with other product attributes to create tailored propositions. For example, consider one or more of the following product management scenarios.
Grace periods. Part of the education process is forgiving accidents. In concert with pre- and post-transaction alerts, for the first instance of an overdraft transaction, offer a 48-hour grace period for the customer to restore the required balance before a fee is charged.
Minimum account balances. Offer one free overdraft transaction per year if the customer maintains a minimum average monthly balance for a six-month period (provided the original balance is restored within 48 hours).
Segmentation. A segment-based approach to overdraft fees may reveal additional insights. For example, you may identify a group of customers that shares certain overdraft behaviors, which may indicate an improper product fit. This is an opportunity to proactively engage the customer to discuss alternative options your bank may offer.
Loyalty programs. As part of a bank-wide loyalty program, offer the customer the option of redeeming loyalty points earned for any retail product to offset overdraft fees. Or, to reward desired behavior to targeted customers, offer bonus loyalty points for each six-month period in which the customer avoids an overdraft fee.
Product and Pricing Lifecycle Management can help financial institutions design customer-centric, relationship-based products and pricing, including value-added features that are both easy-to-understand for customers and profitable for the bank.
For more on fee transparency, relationship pricing, segmentation and related trends, check out Zafin’s quarterly publication, Relationship Banker: Journal of Product and Pricing Lifecycle Management. Subscribe today!