Four Letters. Infinite Potential.

Matrix overdraft systems: more risk than reward?

By Richard Miller
Executive Vice President


Matrix-based overdraft systems have been around since the 1980’s. Originally popularized in large bank environments by a company called Earnings Performance Group (EPG), these systems automated the pay/return decisions on overdrafts based on predetermined criteria. It was a good idea at the time because many banks were making manual decisions and/or returning nearly all NSF items. By automating the process, matrix systems were responsible for increasing NSF and Overdraft (NSF/OD) revenue by at least 25%.

A matrix program is basically an old-line product that has many flaws and consequences for both consumers and your staff. One notable issue is that a matrix program is difficult for staff to explain. Worse still, it is even harder for the consumer to understand. 

Several disadvantages of matrix-based overdraft systems with “dynamic” limits have become apparent in the face of increased regulatory scrutiny on consumer-oriented financial products:

  1. Greater risk for potential compliance-related issues, including class-action lawsuits
  2. Less financial security for consumers which weakens trust and may negatively impact account holder satisfaction and retention
  3. Undisclosed and adjustable overdraft limits lack the transparency so widely desired by regulators

On average, matrix systems are generally used by less than 10% of consumers and their heavy use means those consumers are constantly at risk of charge off.

Where is your NSF/overdraft revenue coming from now? 

If you don’t have a disclosed overdraft solution, your NSF/overdraft revenue probably comes from the regular NSF/OD users, your “heavy users.” These are the folks who test the system all the time and are willing to roll the dice on your undisclosed pay/return decision. Why not allow the rest of the consumers to use the “service” by helping them to make an informed decision? Most of these consumers would use the service occasionally as a safety net, but only with full knowledge of their overdraft limit and associated fees. They are generally more conservative than the risk-takers, and they will not take a chance on you returning an item unpaid. In fact, they are the consumers who need to understand your overdraft procedure before they use it. 

These consumers may have a short-term financial need they are satisfying in some other way, most commonly, by paying late charges. Or, they may pay fees to some other outside source where they are confident they can get the money. Is that what you want your consumers to do? Pay late or pay more?

Once your bank or credit union is paying 90%-95% of items stemming from the routine NSF writers, the only way you can increase income using a non-disclosed overdraft program is to increase the NSF/OD fee or—even worse—add a new fee. Today, there are financial institutions with NSF/OD fees at or over $35 and some even as high as $40. While the increased revenue may look good at first, keep in mind that consumers often choose to avoid fee increases and NSF/Overdraft volume have proven to decline over time. Those with fees at $35 or more have measurably crippled the additional value for the overdraft service.

Let’s look at the advantages of a fully-communicated and disclosed program: 

  1. The NSF/overdraft revenue stream is no longer solely dependent on heavy users
  2. Charge-off percentages decline because the added volume is derived from a more conservative group of account holders who only use the service when it’s beneficial
  3. Account holders, with some exceptions, know they have a safety net if needed
  4. Your staff can clearly explain to account holders how the program works

It is much easier to get a Regulation E decision if your account holders understand exactly what they are opting into. Conversely, with an undisclosed matrix-based program, account holders are unclear about the overdraft service, and may not feel comfortable opting in for ATM and everyday debit fees. 

Is Regulation E important? With at least 70% of transactions occurring through ATM and everyday debit transactions, financial institutions need to accommodate overdraft fees for these channels on as many consumers as is practical. The math tells us that as check transactions continue to diminish and as electronic usage increases, consumers are more likely to experience an overdraft for a debit card transaction than for a check or ACH item. 

Take the long-term view 

It’s easy to get enamored with matrix systems with fancy sounding names and the lure of a “plug and play” program. The problem is that matrix systems are not sustainable from a service and revenue standpoint. High NSF/OD usage by routine overdrafters can easily become high charge-off rates. When a heavy user is charged off, that revenue is gone for good. 

A better approach is one where both the consumer and the financial institution are committed to occasional overdrafts by many account holders instead of heavy usage by just a few. Be the financial institution that helps consumers with occasional short-term needs instead of the one that inspires class action lawyers to troll consumers who feel they’ve been harmed by high fees for undisclosed overdraft services.


Learn more about disclosed overdraft programs:
The Many Benefits of JMFA Overdraft Privilege
Building Trust with Account Holders




12 months 2020 2020 vision 40 years Academy account holder account holder retention account holder strategies account holder strategies; growth strategies; account holders accountability Achieve achievements Advancements Advice Agreement analysis Analytics announcement Assistance ATMs Attendees attracting talent Automation B2B Balance Bank Bank of Pacific Banking banking services banks banks and credit unions batching Benefit best practices board governance board member board of directors Bob Layendecker bottom line branch equipment branch profitability branding Bryan Hanks budget bundling business business culture business environment business practices business processes business strategies career advice Career Goal case studies Case Study CEO onboarding CFPB Challenges change Charles Shanley Cher Cheryl Lawson Choose Chris Karstens Classroom clients Cloud Cohron commitment Communication communications Competitive Complaint Compliance compliance examinations compliance risks compliant Conferences Consistency Consistent consultant Consultation consulting Consumer Consumer FInancial Protection Bureau consumer protection Consumer-focused Consumers Contingency Contingency Pricing contingency-based fees Contract Contract Analysis Contract Negotiation contract negotiations Contract Optimizer Contract Renegotiations contract review contract staffing Contracts Convenience core processor contracts Cornerstone Credit Union League corporate culture corporate governance Courtesy Pay CPE credits Credit Card credit card contracts credit cards Credit Union credit unions Crissandra Fry CSS culture customer service cyber security Damian Darin Byrd Data database Deal debit card contracts Debt Decisions Development Dick Miller digital directors Disclosed discounts Discussion Donna Sumrall Dynamic economy Education efficiency studies election Email Emergencies Emergency employee employee retention employees EMV migration Engagement evaluation Evolve executive search Expectations Expense expense management expense reduction expense studies expenses Experience Expert expert negotiations Experts Facilitators FastTrack Federal Reserve Board Feedback fees Financial Financial Institution financial institutions financial services financial stability Financial Worry FinTech Fixed limits Floyd's Forum Free Analysis full disclosure Fully fully disclosed overdraft program Gen Z Generating Income generating leads generation Generation Z Gift Goals governance government Grow Gym Halloween Hammond Happiness hiring HKW Holiday Holidays HR HR Consulting HR policies Hubur