Checking fee income is facing extreme downward pressure during 2021, influenced by competitive factors and the specter of greater future regulation. For an America that’s benefited from more than $5 trillion of stimulus money, news of waiving overdraft fees may sound like another big win for the consumer. However, this issue is not so cut and dried for two important reasons:
Several financial institutions are following the SpotMe initiative introduced by fintech Chime by waiving overdraft fees. Sounds like a slam dunk, but here are a few things bankers and consumers should consider:
Sadly, policy makers and consumers will deem all these industry and consumer costs as “unintended” because … who knew!?
Here’s what’s ironic: the consumer-focused statistic the Consumer Financial Protection Bureau should be tracking is the Pay Ratio. Do financial institutions truly “have the customer’s back” by paying items presented instead of returning them? For families working paycheck to paycheck, keeping payments moving keeps daily living afloat.
With this reality in mind, there are important consumer-friendly practices related to the maximum number of daily fees, the actual fee amount, proactive balance alerts, and financial education that keep overdraft fees from deviating into a dysfunctional cycle. Financial institutions should explore these strategies in earnest while remembering the friendliest thing an FI can do for the consumer is to PAY THE ITEM!
Also, bankers should be careful not to over-glorify Chime’s SpotMe. This free overdraft program starts at a measly $20 and requires an electronic deposit. A consumer may then qualify for up to $200, but in the fine print, one will note SpotMe only applies for electronic items: no checks or ACH overdrafts. Some FIs considering following Chime’s move are considering all overdraft items.
Again, these FI’s are missing the point that the most important goal is to “strive to pay” items on behalf of the consumer. Most FIs have much higher overdraft limits for consumers than Chime’s $200. Most flat limits for consumers are more than double Chime’s, and FIs with dynamic limits have limits as high as $2,000. So, what will happen to these consumers if limits must decline as the fee revenue vanishes? Bankers and consumers really don’t want to return to the days when all items were returned.
Non-interest income accounts for roughly 25% of the average financial institution’s revenue, and now this revenue that helps sustain broad retail convenience offerings is under attack. Retail bankers should be talking strategically about just how impactful declines in non-interest income may be for their bank’s earnings. Bankers first saw this effect when the Durbin amendment slashed debit and free checking all but vanished at the big banks.
Challenger banks see an advantage to eliminate overdraft because they have no branch system. This equation is much more difficult for more traditional FIs. To compete in the future in this fee-challenged environment, banks and credit unions must use analytics to truly understand the value contribution of their retail delivery system while also maturing their digital growth programs.
Creating the “right data” to leverage and then using it effectively to drive digital customer acquisition and engagement is more vital than ever as the legacy retail banking model. While most consumers do not bank mobile-only today, the mobile-first players and growing scenarios around overdraft regulatory practice mean that traditional financial institutions will face increasing pricing pressure from these players. Optimizing this transition takes planning, analytics, and a clear vision of who each bank wants to serve and how they will align the delivery experience around a specific strategy.
The new world of overdraft competition and regulation will require a stronger focus on retail delivery channel investments and the proactive development of digital growth strategies.
Analytics can be an important tool in executing this strategy to answer the following key questions:
GonzoBankers have a lot of work ahead responding to these major shifts in retail banking and setting a smarter growth strategy for the future. Hoping these pressures will simply go away is unrealistic – this year’s strategic and budget planning is a good time to start addressing these new realities.
4 thoughts on “Quandary 2021: Responding to Competitive Shifts in Overdraft Fees”
Great job getting beyond the headlines to examine the potential ramifications of reflexively following the herd.
Thanks much Steve. Yes it’s a challenge for many FIs. Every FI would like to have an answer and be competitive regarding new client acquisition, at the same time, they still want to provide the higher, much-needed limit so that they can strive to pay customer items.
You touch on the difference in business models, which seems to be overlooked far too frequently when CUs decide to “pick & choose” from all the cool things they see Fintechs doing, not realizing the role of business model. CUs are (mostly) very branch-centric with high-cost physical delivery channels, so we need to tread carefully and thoughtfully before trying to emulate the business strategy and models of Fintechs who generally operate with little or no physical delivery channel cost. Be wary and thoughtful before adopting conflicting business models. CUs can and need to modernize, but we must be cautious about the equivalent of being a Saks or Macys and then trying to compete with WalMart on an “everyday low price” strategy. If a CU wants to give up non-interest income, first understand the role and reliance upon non-interest income for generating your ROA, and determine the how the business model needs to be adjusted to make this a proper move.
Precisely!! Couldn’t agree more.
Also, more reason for FIs to accelerate their Digital Growth initiatives – close the ROI gap a bit, narrow the differences for digital-preferenced consumers, and address (real or perceived) shortcomings re: new client acquisition.