Fee income continues to be a significant factor in bank earnings. When it comes to fee income, though, all banks are not created equal. Using 2006 FDIC source data, the national average for “service charges as a % of transaction account deposits” is just over 2%. The country’s largest banks (those with total assets greater than $25 billion) achieve an earnings level of over 7% of service charges as a % of transaction account deposits, while banks with assets between $500 million and $25 billion only earn about half that, at 3.65%.
What’s different? Why do the “big boys” generate twice as much fee revenue on deposits as their smaller competitors? The reasons are numerous, but a change in viewpoint probably comes first: bankers sometimes overlook profit-making opportunities hidden deep in the bowels of their own bank—commonplace functions that have never before been considered “a profit center.”One of the most unglamorous of these locations is home to the gnomes who process returned deposit items, a.k.a. RDIs or “chargebacks.” In their simplest form RDIs are checks, typically deposited by merchants in payment of services, which are later returned NSF by the bank they were drawn on.
Although some bankers remain a bit uncomfortable with overdraft protection programs, most banks have overcome those qualms and are now generating significant fee income from ODP programs. Chargebacks are the “other side” of the ODP equation, if you will, where a pizza shop owner who has deposited the check used to purchase a pizza then receives the check back “Drawn on NSF.” The pizza buyer’s bank didn’t pay the NSF, though you can bet it collected an NSF fee! Now, the pizza shop must collect the check from the inadequately-funded pizza buyer. Just as with ATM surcharges (another key source of fee income from other banks’ customers), there is additional revenue to be obtained from this NSF transaction. The source of the incremental fee income is not the bank’s customer base, the additional income is from the pizza buyer—who is probably NOT a bank customer.
Expanded chargeback automation and collection is a natural outgrowth of a bank’s item handling capability. Though not a traditional “cash management” service, it is valued—most merchants appreciate the assistance and would prefer to deal with their banks rather than the commercial check collection services that are generally not bankers. In the largest banks, entire departments specialize in this service. Remember that statistic? The biggest banks have earnings levels of over 7% of service charges as a % of transaction account deposits, while banks with assets between $500 million and $25 billion only earn about half that, at 3.65%.
Chargebacks can be a meaningful source of fee income. Not only is there a chargeback fee assessed to the merchant for handling each returned deposited item, there is also the opportunity to assist merchants with collection of these items. In particular, ACH collection of RDIs for bank business customers is a service rapidly growing in popularity that can improve new commercial account acquisition. It can be a tie-breaker in a competitive situation, and it further deepens existing commercial relationships with the bank.
ACH collection works for both paper and electronic returned items. The reasons for this growth in popularity are several:
With ODP, many banks prefer to handle overdraft courtesy pay using internal staff and institution-specific procedures. Other institutions look to specialists in the field who offer services which increase a bank’s collection ratio using proprietary methods and procedures—but these service providers also extract a fee from the bank’s potential revenue stream. The same options exist with respect to chargeback processing—banks can increase fee revenue from this source using procedures developed in-house, and there are specialists in the field who can provide the service for those who prefer to outsource specialized functions.
Chargeback processing services are provided by commercial service providers and some larger correspondent banks. Key considerations that differentiate products in this arena include the following:
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For banks that decide to make chargeback collections a profit center, what are some of the operational considerations?
Chargeback collections can be applied to more than just returned paper checks, including ACH check conversions and other transactions originated as an ACH item – transactions such as TEL (payments made by telephone), WEB (payments made online) and PPD (pre-authorized payment debits). Following are the transaction possibilities and chargeback options:
1. Paper Check Payments (customer writes out a check and submits to merchant)
2. ACH Check Conversions (customer writes out a check and submits to merchant)
3. Other ACH Originations (customer uses the telephone, Internet or other means to make payment)
With any of these, the item is maintained as a TEL, WEB or PPD through the clearing process. If an item is returned, the bank will extract any NSF returned item from the NACHA returned batch file and send it for re-submission. Only NSF returns of these items are eligible for re-submission; the information contained in the NACHA file is limited and prevents any “secondary collection” attempt.
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