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Home » Articles & Posts » What’s the Real Motivation Behind Sweeping Changes to
Overdraft Services?


WHAT’S THE REAL MOTIVATION BEHIND SWEEPING CHANGES TO OVERDRAFT SERVICES?

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Articles & Posts
Overdraft Privilege
JMFA | February 7, 2022
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Avoid confusion and criticism with full disclosure and reasonable fees

 By JOHN COHRON, JMFA Chief Executive Officer

Changing market conditions and renewed interest by regulators to address
products and procedures that are perceived as harmful to consumers have fueled
sweeping changes in some overdraft strategies recently. For undisclosed programs
and those with fees that have steadily escalated over the years, such changes
may be necessary as regulators attempt to rein in overdraft practices that run
counter to their calls for transparency.  

The news from some of the nation’s largest banks making major modifications
doesn’t mean that overdraft services aren’t beneficial to consumers. It just
means that some program strategies are out of line with regulatory expectations
and what consumers need. This fact was punctuated recently in comments by Acting
Comptroller of the Currency, Michael J. Hsu, who said, “limiting overdrafts may
limit the financial capacity for those who need it most.”

In fact, in a joint letter to the CFPB, industry trade organizations
representing both banks and credit unions have requested the agency to study
consumers’ preferences regarding overdrafts, including a list of areas that
should be investigated.

Sweeping changes can stir up unexpected consequences

Financial institutions should absolutely be re-evaluating their overdraft
approach to ensure they are doing right by the consumers they serve. However,
making changes without the right direction and resources can create difficulties
for account holders who trust their financial institution to “have their back”
when they have liquidity needs.

For instance, eliminating overdraft fees may sound appealing, but what happens
when a transaction exceeds an account holders’ balance? Is it covered or
returned? If it is returned—for a mortgage, rent or utility payment—will the
result be a disruption of service or penalty fee that exceeds the original
overdraft fee?

If the consumer doesn’t know when a transaction will be paid or is surprised by
merchant return fees or other charges, how is that providing good service? Or,
when a returned item triggers the reduction of a consumer’s credit score, making
it more difficult to get a loan or land a job, how is that building trust for
the future?

What’s more, reducing an overdraft fee from $35 to $10—as Bank of America
recently announced—may seem like a major concession, but will other fees need to
be put in place to make up for lost revenue? Swapping one fee for another—or
increasing balance requirements to access a service—isn’t exactly the best way
to garner goodwill since it can make having a checking account unaffordable for
some consumers.

Prevent confusion and controversy with reasonable fees and transparent
procedures

A consumer-focused overdraft strategy should include a beneficial last-stop
option to your other service offerings, i.e., accessing funds from another
account, a credit card or line of credit, that can help your account holders
when they need access to liquidity. If they have difficulty managing their
checking account and do not have a savings account or access to a line of credit
to cover an expense, a fully disclosed, reasonably priced overdraft privilege
service provides a reliable safety net.

When consumers know the fee and their limit upfront—along with how to use the
service responsibly—they will find value in having access to convenient
financial peace of mind.

Gain confidence with a thorough program evaluation

The best approach begins with open communication and transparency regarding how
your overdraft privilege services work. A comprehensive, professional program
review can identify important details that will benefit your account holders and
your financial institution, such as:

 * Does your overdraft strategy follow a consumer-first approach?
 * Is your fee structure appropriate for your market?
 * Are your processes and procedures fully transparent?
 * Are your account holder communications effective and compliant?
 * Are you offering financial education to all account holders to limit
   excessive overdraft usage?
 * Do you have other service options available that might be a better fit for
   some account holders?
 * Is there an effective staff training program in place to increase employee
   knowledge and confidence?
 * Which key metrics should you be monitoring to ensure effective program
   results?

Stay on the consumer side of service delivery

No one can ignore what’s currently happening with market changes. But limiting
consumer access to a responsible overdraft privilege service isn’t the right
solution if your operational philosophy is built on providing financial
stability to your account holders. Despite the current narrative, there is a
need for overdraft services. More importantly, there is a way to deliver the
service so it is fair, transparent and consumer-friendly.

About JMFA

JMFA is one of the most trusted names in the industry. Whether it’s recovering
lost revenue, uncovering new savings with vendor contract negotiations, creating
more value, serving account holders better or delivering a 100% compliant
overdraft service—JMFA can help you deliver measurable results with proven
solutions. To learn more please visit www.JMFA.com or call (832) 514-2334.



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