Charting a Course for Responsible Overdraft Practices

Overdraft services continue to be a focal point for regulators and mainstream media. From the CFPB’s much anticipated proposed rule alongside efforts by regulators to eliminate problematic overdraft practices, there is intense pressure for community banks and credit unions to evaluate their overdraft strategy to ensure it is consumer-focused and responsible. Embracing proactive measures to meet market demands and regulatory expectations is essential for achieving sustainable growth.

Rather than adopting a passive “wait-and-see” approach or making sweeping fee adjustments, conducting a thorough analysis of your program and fee structures is important. A consumer-friendly overdraft strategy begins with carefully reviewing your program through the lens of your account holders, prioritizing transparency.

Regulators consistently stress the importance of disclosure and clear communication. Providing upfront program details, including overdraft limits and fees, is crucial for prioritizing the needs of your account holders. It comes down to them being able to make an informed decision about using a valuable service that is easy to understand.

In fact, consumers have a need and are willing to pay for the service. A national survey conducted by Morning Consult found that:

• 88% of consumers found overdraft protection valuable.
• 77% of consumers who paid an overdraft fee in the past year were glad their payment was covered rather than being returned or declined.
• 63% percent of consumers think it’s reasonable to be charged a fee for an overdraft.

As industry leaders and policymakers deliberate on the future of overdrafts, acknowledging these realities becomes imperative.

Implementing a proactive overdraft strategy should align with offering a valuable, better service.

When evaluating your overdraft strategy, three important areas to consider include:

1. Reducing consumer costs: Demonstrating meaningful changes to your consumers is crucial. For instance, implementing a grace period and evaluating your fee are two ways to tackle fairness and reasonable fee structure issues. If you have the technological capabilities, employing strategies like low balance alerts and early direct deposit can lower costs for your account holders. Of course, understanding the impact of reactively making changes can be daunting. Ensuring you have the right tools and expertise is paramount.
2. Mitigating institutional risk: You can pull a few levers to ensure the stability and resilience of your financial institution. Reviewing disclosures, policies, and procedures for AP/SN transactions and re-presented items are significant areas that require time and resources. Moreover, implementing robust risk management frameworks, conducting regular assessments of internal processes, and staying abreast of evolving regulatory requirements must be on your radar. By proactively identifying and mitigating potential risks, you can safeguard your organization’s operations and maintain trust among stakeholders. Often, the challenge is knowing where to look and having in-house expertise.
3. Minimizing examination risk: Maintaining accurate records, implementing better internal controls, and prioritizing transparency are key factors in reducing scrutiny. For example, are processes consistent across all branches? Are training resources for your staff up to date and readily available? Are your account holders able to easily access information about the service? There are several ways you can stay ahead and streamline the examination processes to reduce your risks.

Act now to show your account holders you are in their corner.

Redefining your overdraft strategy will ensure you can deliver on your mission to promote financial health and well-being. These are meaningful ways you provide a responsible overdraft service that your account holders can rely on.

When you put overdraft best practices into motion today, you are planting the seeds of trust that can grow into stronger loyalty through all the stages of your account holders’ financial journey.

Contact us for a complimentary analysis of your program, which could reveal new areas of opportunity and help you stay ahead of pending regulatory rules and examiner scrutiny.

Check out our webinar, “Overdraft Overhaul: Insights into the CFPB’s Game-Changing Proposal,” to learn more about the latest regulatory activity.

John Cohron serves as the Chief Executive Officer at ADVANTAGE. With over 20 years of experience managing consulting operations and technology development, he is a forward-thinking leader passionate about driving innovation and growth.

ADVANTAGE, powered by JMFA is a trusted provider to the industry for overdraft consulting. We are focused on communication, transparency, and improving outcomes for community banks and credit unions with a written 100% compliance guaranteed overdraft service. To subscribe to our news and updates, visit advantage-fi.com/newsletter.