By Richard Miller
Executive Vice President
A low-volume, upper-price business model may work well for realtors of million-dollar homes, but if your bank or credit union is considering implementing an overdraft protection program—or adapting an existing one—choosing a model that includes a broad pool of prospects and a reasonable rate can have a greater impact to income results. Wide reach can allow consumers’ costs to remain consistent, with participation driving income and consumer satisfaction.
Conversely, hoping that a program can produce sufficient income when arbitrary or dynamic prices are imposed on a smaller pool of account holders may instead create attrition and a sustained cycle of price hikes to offset declining volume.
In Econ 101, we learned about the Law of Substitution, where consumers flee rising prices by reducing consumption or seeking cheaper substitutes. The following are traditional consumer reactions to price uncertainty or periodic escalations:
- Consumers responded to rising gasoline prices by curbing their miles driven, and then sparked demand for mileage-friendly cars, including today’s hybrid and electric-powered models.
- Escalating newspaper prices have led many readers to reduce or abandon the medium, cutting revenue per subscriber by 25%-100%.
- Similarly, cable TV providers’ rate hikes often trigger backlash, churn or price capitulation.
Given these well-documented examples, a similar fate might be anticipated for a business model that expects income from a combination of dynamic pricing and a limited account holder base. In short, consumers may modify their usage, seeing prices as less elastic than providers might anticipate.
Instead, offering a transparent, fully-disclosed overdraft program at a reasonable rate that highlights opportunity, dependability and availability can produce increases in your income and satisfaction.
Opportunity for your financial institution is evidenced by both a recovering economy and published data:
- According to the 2013 Federal Reserve Payments Study, debit card payments tripled from 2003 – 2013. The most popular non-cash payment form, their usage nearly doubled that of credit cards, and every indication is that their pace has maintained or grown.
- Monthly debit card point-of-sale use grew 32% from 2005-2014, according to the Pew Center.
- 2015 FDIC figures indicate a rise of nearly one million unbanked households in the United States, plus 25 million underbanked households, who are often described as being dissatisfied with their current provider and represent “low-hanging fruit” to consumer-minded financial institutions.
Consumers have high expectations in their banking relationships. Balances are accessible, deposits are insured and staff knowledge and familiarity often breed trust. With a reasonably-priced and fully-disclosed overdraft protection plan, consumers can count on:
- Limits established with the full knowledge of the account holder
- Purchases routinely paid in the event of a temporary account shortfall
- Transaction clearing policies that avoid maximizing overdrafts by sophisticated algorithms, and the resulting fees
A fully-disclosed plan supports the financial institution’s income and account holder satisfaction objectives by:
- Being accessible to nearly all holders of basic checking accounts, and to debit card holders who opt-in
- Featuring clearly written materials that educate the account holder and allow them to make a fully informed decision
- Not discriminating among customers, but instead providing value in the form of reasonably-priced, user-friendly products and services
If your bank or credit union is re-evaluating service offerings including your overdraft solution don’t lose sight of how consumers often respond to vagueness or uncertainty. They tend to restrict or pull back, similar to how financial markets often fall in times of ambiguity. Accordingly, it may well behoove you to choose the transparency of a fairly priced, fully-disclosed overdraft protection program—one that allows the consumer to make a fully-informed decision—and let participation and income grow organically from the derived value.
Learn more about overdraft programs:
The Many Benefits of JMFA Overdraft Privilege
Building Trust with Account Holders