By Cheryl Lawson, Executive Vice President-Compliance Review
Despite the fact that regulators continue to delay a ruling on overdraft services, consumers continue to need help with managing their finances from time to time and financial institutions are struggling to find reliable sources of revenue.
Under these circumstances, it is more important than ever to provide account holders with a reasonably priced, easily understood and non-discriminatory solution that helps them to maintain their financial well-being. When this solution also provides your bank or credit union with a reliable revenue stream and regulatory peace of mind, everybody wins.
Over the past 10 years there have been several regulations or proposed guidance on overdraft solutions, but yet there has been no firm directive from regulatory bodies that disallow overdraft programs. So the question becomes, how to implement an effective solution that:
• is sensitive to regulatory comment or perspective;
Provide better services that are fair to all
• satisfies the needs of your account holders that may experience a temporary financial shortfall; and,
• helps your bank or credit union achieve its revenue goals.
Regulatory compliance is essential for a value-added overdraft solution
Simply stated, regulators expect financial institutions to be transparent. A fully-disclosed overdraft program clearly defines the rules by which an account holder may access the service. This straightforward approach of responsible use provides your account holders with the information they need to make a more informed decision on whether or not to use a product, based on their individual circumstances.
This allows your financial institution to demonstrate to examiners that the program is in compliance with all regulations and guidance regarding how the program works, how limits are set, how fees are assessed, what information is included in disclosures to account holders and much more.
With the myriad financial products and services available today, an informed consumer is the wisest consumer in the marketplace. A fully-disclosed overdraft program is a valuable tool that can strengthen the account holder relationship by:
• informing them ahead of time what the service is going to do for them;
Effectively address non-interest income
• providing access to overdraft coverage whenever they need it;
• furnishing information using the service and how to bring their account current; and,
• communicating all costs plus alternatives that may be more appropriate.
If an account holder uses the service in a way that it isn’t intended, you can provide guidance on his or her use. When account holders know their financial institution trusts them to bring their account current it strengthens the bond and relationship—improving account holder loyalty.
With the recent low interest rate environment and a lack of new revenue-generating products and services, financial institutions are more challenged to increase income. A disclosed overdraft solution provides more consumers with the opportunity to use the service, thus there is more of an opportunity for revenue generation. And let’s face it, at some point in time many consumers make a mistake on their account, miscalculate when a deposit will clear or experience an unexpected financial need. By using the overdraft program occasionally – not all the time – that large universe of accounts represents potential revenue.
On the other hand, when a program is undisclosed, the only people who know about it are the ones who overdraw their account. And since that is a finite audience, at some point you max out the ability of that group to provide additional income to the institution. Add to that the possibility that, over time, some of those users could become charge-offs, move or leave your financial institution altogether.
The alternatives come with risks
While much has been written lately about matrix-based overdraft solutions that offer dynamic limits, there are compliance concerns with these programs. The amount of privilege or negative balance amount fluctuates so the account holder doesn’t know from one day to the next whether the limit is $1,000 or $100. What’s more, the formula is complicated creating difficulty for staff to explain the details of the limit to the account holder let alone explain why the limit is what it is. This goes against the grain of regulatory expectations of program transparency.
Don’t go it alone when it comes to compliance expertise
And while a program with dynamic limits may offer more control for the financial institution, it is important to consider that is also discriminatory against those account holders who don’t get the privilege because of low account balances.
Maintaining comfort with and compliance around the regulations associated with overdraft programs is a huge responsibility. If you don’t have a high level of expertise within your organization, it is important to partner with a provider that offers a fully-compliant overdraft solution as well as regulatory knowledge. Then, in the event of regulatory rulings, you can rest assured that you will be informed of any changes and receive the resources necessary to update your processes, forms, account holder communications materials, or terms or conditions.
What are you waiting for?
As we all know, the regulatory process is slow. It is approaching five years since regulators started looking at a possible ruling on overdraft programs. During that time, many financial institutions have hesitated to implement a program because of uncertainty surrounding what ruling might be released. However, in the event there isn’t an overdraft ruling until 2017, what are you doing for your account holders that need a financial safety net for the next year? What are you doing to generate income for your bank or credit union?
At this point, if you don’t offer a fully-compliant overdraft solution your greatest risk is losing accounts to other financial institutions that do offer this valuable service. They are the ones that can respond to account holder needs, and have the opportunity to earn the revenue necessary to fund new technology-based programs and other highly sought after services.
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