America loves its debit cards, but hates to balance its checkbook. Banks seek ways to keep providing a popular service under tough new Fed rules. Congressional restrictions, however, are still a possibility.
Financial institutions get ready for July 1 deadline for debit-card overdraft compliance. But the threat of congressional action to effectively block the service hasn’t evaporated
By Steve Cocheo, executive editor,
“Transparency and informed choice are the keys here,” says ABA expert. Banks that get it right stand the best chance of preserving debit overdraft for customers
Teche Federal Bank’s Ross Little may be the envy of most community banks in America. All who offer even an informal overdraft checking service that includes debit cards and ATM transfers and withdrawals face a July 1 deadline to obtain customers’ “opt in” to overdraft charges, in exchange for being able to use their cards even if they lack sufficient funds. Many banks have yet to mail a single notice.
But the $750 million-assets thrift, based in Franklin, La., has already reached two-thirds of its debit-card customers, and over 90% of them have opted in. Little, senior vice-president, marketing, had expected to do wave after wave of expensive direct mail, with diminishing returns. He didn’t like the math. After some research about customer transaction patterns, he found his solution.
“We trained our tellers to talk to customers about opting in,” says Little. The bank’s 100-teller force became quite focused about it, and Little believes Teche Federal is well on its way to maximum opt-in.
“The tellers know the customers,” says Little. “And it appears that customers want this service—and overwhelmingly want it.” Like many community banks, Tech Federal doesn’t market fee-based overdraft, but offers it case by case. But under the Federal Reserve’s November 2009 amendments to Regulation E, any financial institution offering the service at all—whether ad hoc like Teche or a marketed, automated program—must comply with the opt-in rules, and more.
“Transparency and informed choice are the keys here,” counsels Nessa Feddis, ABA vice-president and senior counsel, and part of a large team the association has working on this issue in tandem with a special banker Overdraft Program Task Force.
The stakes are high, in multiple senses.
Many intersecting trends
After describing the efforts his bank plans for outreach, Connecticut banker Rheo Brouillard describes a key risk: public perception.
“Customers are not going to be angry at the Fed,” if something is misunderstood and they get burned, says Brouillard, task force member and president and CEO, Savings Institute Bank and Trust Co., Willimantic. “They’re going to be angry at us.”
Simple in concept, overdraft programs remain fraught with challenges—political, technical, compliance, communications, financial, and even service-related. This conclusion emerges from extensive interviews with lobbyists, bankers, vendors, and consultants.
Regarding the last challenge—service—some fear the rapidly growing utility of debit cards could be stymied.
“We refer to such risks as ‘unintended consequences’,” says Marc Paine, executive vice-president at Strunk & Associates L.P., an ABA-endorsed overdraft vendor. “This could turn people off from wanting to use debit cards and merchants from being willing to accept them.”
Several trends crisscross here. Certainly, there’s ongoing financial regulatory reform and changing political winds. Changes in credit card law may be revamping credit versus debit demographics. Ever-increasing thirst for convenience plays a role. So do changes in financial literacy, priorities, and attitudes.
“Consumers are not bankers,” says Cheryl Lawson, executive vice-president, compliance review, at overdraft protection vendor John M. Floyd & Associates. “Most consumers don’t reconcile their checking accounts. Most don’t maintain a register.”
“What we are seeing today is ‘transactions in transition’,” says Michael Moebs, economist and CEO of Moebs Services, Inc., a statistical firm and marketer of overdraft services as well.
Consumers often want it
Many bankers stress that increased regulation and the threat of more legislation must be balanced with consumer needs and preferences.
For instance, $159 billion-assets Branch Banking & Trust Co., Winston Salem, N.C., didn’t even consider dropping debit overdraft service, according to Joe Blount, senior vice-president, payment strategies, speaker at a recent ABA telephone briefing. Customers want it, he says, and some depend on it.
Hence, Blount continues, compliance with the Fed’s new regulation, and good communication, are must-dos.
“Our goal,” says Blount, “is that none of our clients will be surprised when the new rules go into effect.”
BofA: Overdraft poster child
Last fall, several large banks took steps to address the overdraft controversy, prior to the Fed’s finalization of its new rule. More recently, one of that number, Bank of America, made front-page news with its early March bombshell that beginning this summer it will only authorize single debit card transactions at the point of sale if a customer has sufficient funds at the time.
“Buzz” doesn’t begin to describe the reaction.
“They had no place else to go, because they were the 800-pound gorilla in the room,” says Joe Gillen, CEO at Pinnacle Financial Strategies, another provider of overdraft protection plans. Gillen believes BofA saw itself in a no-win situation and simply opted to shut off debit overdraft. Drawing on his experience with overdraft programs, Gillen estimates it would have cost BofA at least $20 million just for the direct mail program.
Gillen and others tend to distinguish between community banks’ formal overdraft programs and large banks’ efforts. Frequently, customers of large banks, they said, were automatically enrolled in overdraft services, while smaller banks tended to enroll at customers’ option.
“Bank of America just handed 14,000 banks and credit unions an early Christmas gift,” consultant Mike Moebs opined in a client bulletin. “By changing its current policy to eliminate one-time debit card overdrafts, BofA is offering up tens of thousands, if not hundreds of thousands, of checking account customers to other depositories. … BofA has thrown in the towel.”
Others strongly doubt BofA has permanently abandoned debit overdrafts.
“Customers are going to demand the service,” insists Pinnacle’s Gillen. “Ultimately, people who find the service valuable are going to demand it.” So BofA will reintroduce it, in time. Meanwhile, he says, the megabank scored some points with consumer groups.
During the ABA telephone briefing, speakers suggested that community bankers could use BofA’s announcement as an awareness raiser and icebreaker. In the meantime, they can be training frontline and call center staff to be prepared to address customer inquiries and complaints.
Something must pay for “free”
In order to put the overdraft situation in proper perspective, experts say it’s necessary to understand how thoroughly the retail banking dynamic has changed. Banks, especially community banks, gradually remade the landscape of transaction account pricing, points out Pinnacle’s Joe Gillen. In many markets, free checking evolved into a must-have just to remain competitive. In addition, online banking and billpay either launched as, or quickly morphed into, free services. While financial institutions derive a significant amount of fee income from overdraft service, the cost of providing all the transaction services Americans take for granted as free often isn’t considered.
Ongoing research by Mike Moebs indicates that financial institution overdraft fees track the Consumer Price Index. He’s found that the industry, overall, has only raised prices every other year. Moebs says that while megabanks’ overdraft fees generally are higher than those of community banks, and that the latter charge more than credit unions per overdraft, banks are more likely to waive the fees than are credit unions.
Moebs’ research is conducted among thousands of banks and credit unions. As a result of his research and discussions with executives at very large banks, Moebs believes that their higher fees reflect the cost of convenience. Their extensive branch and ATM networks cost a huge amount to build and maintain. They need to defray that somewhere, he argues.
Indeed, this gets somewhat at a core issue regarding overdraft programs: Why offer the service? As indicated earlier, there are different schools of thought.
Some see overdraft fees as a “parking ticket,” essentially a deterrent, in much the same way as NSF fees (without the protection) are a deterrent.
Others see them as covering costs, and providing a service to customers who need it from time to time.
But there is also evidence that for some customers, overdrawing their checking account is, for lack of a better word, a “lifestyle choice,” reflecting the changing financial attitudes discussed earlier.
“Everybody has the sense that the overdraft customer is poor,” says William Grant, co-chairman of the ABA task force, and chairman and CEO of $1.7 billion-assets First United Bank & Trust, Oakland, Md. Grant notes that research reviewed by task force bankers and staff demonstrates that the only commonality among overdraft users is a lower credit score.
Task force bankers find that busy folks with businesses number among heavy users. Grant notes one member of the group has a small business owner who bluntly said it was cheaper to pay overdraft fees than to pay a CPA to keep his books in order.
Co-chairman Julie Cripe, whose own bank’s formal overdraft efforts are decidedly nonaggressive, points out that even for lower-income users, overdraft fees can be a better option than others.
“It can be cheaper than going to a payday lender or a pawnshop,” says Cripe, president and CEO at $400.7 million-assets OMNIBANK, N.A., Houston. “Ultimately, it’s a product that people want.”
Washington overdraft outlook
Not too long ago, fee-based overdraft seemed threatened by several bills aimed squarely at it. Circumstances have changed, somewhat.
“The Fed rule takes a lot of the wind out of the argument that a law is necessary,” explains ABA’s Nessa Feddis. “It’s a very strong rule.” The tough reg blunted the sense of urgency, as did changes in the status of some key congressional backers.
“But legislation’s always hanging out there; always a possibility,” adds Feddis.
Little holds still in Washington these days. Senate Banking Committee Chairman Chris Dodd—previously a backer of specific overdraft legislation—moved his omnibus reform bill out of committee in late March, hoping for a Senate vote sometime after the Easter break.
Specific overdraft legislation isn’t in there—but a greater threat is, points out ABA’s Wayne Abernathy.
“The new legislation has a blank check in it on overdraft, as well as on any other retail product or service,” says Abernathy, executive vice-president, Financial Institutions Policy and Regulatory Affairs. This is the latest variation on the original Consumer Financial Protection Agency theme that’s been percolating on the Hill for more than a year, and which is included in the House-passed reg reform bill. Financial institutions could face a new agency—or bureau—with a consumerist mandate. Overdraft will surely be in the agency’s mission, and what will follow is anyone’s guess.
“If the major bill fails to pass, the specific bills could resurface,” says Abernathy, “or some states might essay something.” At this point, only a few states are currently considering any overdraft legislation.
There is the occasional wild card, however. For instance, the New York City Department of Consumer Affairs recently weighed in on overdraft, including a warning to banks against using text messaging to persuade customers to opt in.
Technology challenges remain
Hanging out there are several questions as banks work towards the July 1 deadline.
One puzzler, believe it or not, is what the word “sent” means in the context of sending confirmation of opt-in or opt-out to the customer. Another gray area is if and how banks can incent customers to opt in, without running afoul of the ban on discriminatory treatment of those customers who choose not to opt in. But the big question for many institutions is whether their technology vendors will have their act together in time for the banks to comply with the rules. Systems need to be able to distinguish types of transactions and the opt-in/opt-out status of the debit card user.
This has been a major priority for ABA task force staffers and bankers.
“It’s a little bit early to say,” says Abernathy. “They told us, ‘If everything goes right, yes’.” Task force banker Julie Cripe says it was unclear to her that every processor had yet nailed the challenge. The worry is there, understandably, of having to adopt provisional plans if a bank’s core processor isn’t ready on time.
Some of the overdraft program vendors complain about this iffyness.
“Core vendors haven’t been able to give banks any certainty,” says J. M. Floyd’s Cheryl Lawson.
It has even been suggested that not all players are being straight with their bank clients. But individual bankers tell of positive indications from the firms they use. Rheo Brouillard has had extensive discussions with his service bureau and feels good to go. •
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