By Richard Miller, Executive Vice President
Every so often, service companies, industry associations, consumer advocacy groups, regulatory agencies and research organizations release a study on some aspect of consumer financial services. The purpose of the study could be to enhance the consumer experience, affect public policy or assist financial institutions in their efforts to adapt to economic, regulatory, legal or competitive conditions. Whatever the case, findings can serve as a reality check on how different strategies are playing out in real-time.
One area in particular that has been studied extensively during the last 10 years is overdraft revenue. According to recent results, financial institutions saw overdraft revenue reach $34.3B in 2017—the highest level since hitting $37.1B in 2009. Looking ahead, some projections suggest overdraft revenue could eclipse the 2009 total industry-wide by 2020.
For their part, credit unions which have historically maintained lower overdraft fees than banks, have consistently increased overdraft revenue over the past 25 years—in spite of economic downturns during that timeframe.
Industry Call Report data regularly reinforces the fact that overdraft programs provide a healthy revenue source. However, banks and credit unions should be diligent when it comes to setting fee levels. While increased fees may initially lead to increased revenue, this type of return can be difficult to sustain. In fact, some industry data suggests that institutions having a higher fee structure actually lose overdraft revenue, while those that consistently maintain a lower overdraft fee earn a higher percentage of non-interest income.
For example, a $30 per overdraft fee would result in $4,500 on 150 overdraft transactions. However, if the fee was reduced to $25 and the program was opened to all eligible account holders—resulting in an increase to, say, 203 transactions—a financial institution could make an extra $575. This is a compelling example of why maintaining reasonable overdraft fees—and benefitting a greater number of account holders—can actually raise revenue.
Keep the end user in mind for long-term success
There is a valuable lesson to be learned from consumer reaction to price increases on services over the years—
from cable television to cell phone and internet, newspapers, airlines and checking accounts. Typically, the increase results in reduced consumption or leads to a search for lower-cost providers.
Likewise, over time overdraft revenue can decline as account holders—
who may already be facing a financial hardship—
limit their usage or look for less expensive options to meet their emergency and short-term funding needs.
Historically, one of the most common reasons consumers cite for leaving their existing financial institution is fees. A 2016 FICO® survey found this to be especially true for Millennials. Repetitive fee increases can lead to price elasticity that can greatly diminish the demand account holders have for any service. Unfortunately, many institutions may not know that they’re losing revenue because they don’t have the tools or the time to analyze their existing account holder activity.
Recover lost revenue with reasonable fees and user-friendly procedures
We know that consumers are willing to pay a reasonable charge for a reliable service that is convenient and meets their everyday needs—
think Amazon, Starbucks and
Netflix. When was the last time you did a competitive analysis of the overdraft fees in your market?
Two of the most common types of advice consumers want from their financial institution are help with improving their financial situation (41%) and advice to help them keep track of their spending and household budget (33%), according to a J.D. Power 2018 Retail Banking Advice Study
. From a service perspective, a fully disclosed, overdraft program provides your account holders with a dependable, worry-free solution many are looking for when and if they are faced with an unexpected financial challenge.
From a performance and regulatory standpoint, a 100% compliance-guaranteed program with updated strategies, analytics, and account tracking and reporting capabilities can provide between 50-300% sustainable increases in non-interest income from a broad base of eligible accounts—
along with complete compliance peace of mind. As you continue to monitor your growth strategy throughout the remainder of 2018, don’t miss out on increased earning potential. Think of the improvements and account holders service upgrades you could implement with your share of a proven reliable revenue source.
ABOUT JOHN M. FLOYD & ASSOCIATES (JMFA)
For the past 38 years, JMFA has been considered one of the most trusted names in the industry helping community banks and credit unions improve their performance and profitability. Whether it’s recovering lost revenue, uncovering savings opportunities, serving account holders better, finding the perfect personnel fit or delivering a 100% compliant courtesy pay program, JMFA has the right solutions to help you not only meet, but exceed, your goals. To learn more contact your local representative or call us at 800-809-2307.