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Banks and credit unions should be developing intentional strategies to counter the loss of overdraft fee income.
This is reprinted with permission from the original.
Momentum is growing for banks and credit unions to eliminate or significantly reduce overdraft fees, and many institutions are hard at work planning how to navigate this revenue transition.
What started with Ally and Capital One now includes everyone from Fifth Third to $3.9 billion Jovia Financial Credit Union. In addition to the Consumer Financial Protection Bureau, attorneys general in several states are beginning to look at these fees from a consumer protection and regulatory perspective. It seems inevitable that overdraft fees will cease to provide a substantial revenue stream for banks and credit unions.
What is a financial institution to do to offset this loss in non-interest income? Consumers should remember that this revenue helps pay for free branches, digital banking, P2P payments, contact centers and debit cards with $50 fraud loss limits.
While making up all the decreased revenue from overdraft may seem like a pipe dream, financial institutions should be building intentional offset strategies to cushion the blow. Here are some ideas:
1. Redesign Checking Account Offerings
Many banks and credit unions are shifting to a relationship-based model for checking accounts that rewards fully engaged consumers. FIs can reward those who utilize products for their spending and high levels of product engagement with cashback incentives or high interest rates. Some institutions also entice consumers to use debit cards for small purchases instead of cash by requiring a minimum number of debit transactions per month to achieve the account benefits, and some players even charge a monthly fee to those accounts that do not meet the minimum requirements.
2. Market Debit Card Spend
In Cornerstone’s surveys of its Payments School attendees, less than 50% actively invest in marketing to existing debit card customers. Institutions that actively market notably lead their peers in monthly interchange income per card. The days of set-it-and-forget-it debit strategies are over. Financial institutions will lose out if they are not actively encouraging spending on their debit products through systematic, performance-based marketing. Here is a hurdle to consider: Chime is estimated to be getting more than 40 transactions a month from its customers. Banks and credit unions should consider how well they are stacking up to this level of usage.
3. Credit Card Products
Most institutions either sold off or have neglected their credit card portfolios over the last 10 to 20 years. While the top 20 banks own more than 80% of the market, several new entrants have been able to gain traction. Whether programs from Apple, Petal, Chime or other fintechs inspire more bankers, there is an opportunity to create highly profitable, niche credit card products that can drive incremental non-interest income.
4. Business Payment Services
Most FIs have not maximized their debit and credit income on the small business and commercial banking side nearly as much as on the consumer side. Deliberate strategies to grow this income, especially business credit cards, should be pursued. Institutions with niche industry specialties should develop specific payment packages and offerings. Some institutions are even looking at helping business clients drive great merchant point-of-sale and e-commerce income.
While none of these strategies alone will completely offset the potential lost revenue associated with NSF/overdraft, what bankers cannot do is bury their heads in the sand and hope it works out.
If banks and credit unions don’t act now, they run the risk of being more and more outperformed by fintechs and other forward-looking disruptors in the marketplace.
Tony DeSanctis is a senior director with CUESolutions provider Cornerstone Advisors, Scottsdale, Arizona; Lindsay Hooks is a director in the payments and contract negotiations practice at Cornerstone.
