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u003cemu003eDiligence regarding overdraft practices and disclosures can prevent regulatory and service quality risks.u003c/emu003ennAs expectations for faster, more convenient financial services continue to grow, focusing on technology and innovation has become increasingly more critical to address consumer demand. But, as you focus more of their time and efforts on the development and implementation of solutions designed to best meet account holdersu2019 financial needs, itu2019s imperative to maintain awareness of existing issues that can put revenue, account holder relationships and reputation at risk. Products and services that arenu2019t monitored regularly or maintained properly can become performance and service liabilities and can expose your institution to increased regulatory scrutiny.nnu003cstrongu003eMonitor the reliability of your revenue sourcesu003c/strongu003ennA decreasing number of income-producing sources and the possibility of a reduction in interchange revenue could have a significant impact on the bottom line going forward. If the recent settlement of the class action, anti-trust lawsuit involving Visa/Mastercard and a group of U.S. retailers results in merchants opting to pursue their own lawsuits to negotiate for better rates, the outcome could strike a blow to essential fee income.nnAdd to that, thereu2019s a new threat created by retail mobile apps. According to au00a0u003ca href=u0022https://newsroom.synchrony.com/document-library/retail-consumers-adopt-new-technologyu0022u003estudyu003c/au003eu00a0by Synchrony, consumer use of mobile payment technology is on the rise. Forty-nine percent of respondents indicated they are making purchases through such services. Whatu2019s more, consumers are becoming more comfortable funding merchant apps with mobile payment providers such as Venmo, Square and others. This change in consumer purchasing behavior could further threaten interchange fees.nnA proven strategy for improving revenue opportunity is the implementation of au00a0u003ca href=u0022https://www.jmfa.com/overdraftprivilegeu0022u003efully-disclosed overdraft programu003c/au003e. In addition to providing a reliable source of non-interest income, it offers the on-going benefit of financial peace of mind for your account holders, in the event they experience a financial emergency or make an error on their account. When implemented and maintained properly and effectively, an overdraft program is a compliant strategy to help meet and exceed expectations for your performance and service goals.nnu003cstrongu003eMaintain awareness of compliance expectationsu003c/strongu003ennAdhering to industry regulations and best practices around program procedures and account holder disclosures is key to maintaining a compliant overdraft solution. And while there have been no recent regulatory changes regarding overdraft programs, guidelines released in the Federal Reserveu2019s July 2018 Consumer Compliance Supervision Bulletin addressed a wide range of consumer protection issues, including unfair or deceptive acts or practices related to overdraft services.nnOne issue in particular that continues to be a concern for financial institutions is the uncertainty around the assessment of an overdraft fee for POS transactions that were authorized on good funds but settle after the account balance has been depleted by an intervening transaction that causes there to be insufficient funds to pay the original POS items (Positive Swipe/Negative Settlement).nnIn a best-case scenario, when a POS transaction that is above a merchantu2019s floor limit is approved u2014 because there are sufficient funds in the account to pay for the item u2014 the core processing system is authorized to hold the dollars associated with that transaction to ensure that it will be paid when it posts. This protects that amount in the event that other transactions are presented before the authorized amount settles. If no other transactions come in, the held amount is released back into the balance and the approved transaction is paid.nnThe problem occurs when other items u2014 including POS debit card transactions that fall below a merchantu2019s floor limit and donu2019t require authorization or checks, ACH items and teller transactions u2014are presented against the account while the authorized amount is being held from the balance. This causes the account balance to be depleted. If the balance is fully depleted and the account is negative when the held amount is released, there arenu2019t enough funds to pay the amount that was authorized.nnAccording to the Federal Reserve bulletin, charging an overdraft fee on the authorized $80 POS transaction in this circumstance is a violation of the Unfair and Deceptive Acts and Practices (UDAP) Rule because the available balance was positive at the time of authorization. Under regulatory guidelines this transaction cannot be assessed a fee at the time of settlement, regardless of the account balance.nnGuidance on this issue has been advanced by all regulatory agencies since 2015, when the Consumer Financial Protection Bureau (CFPB) released its supervisory guidelines. This issue was addressed again in 2016 during an all-agency webinar.nnSince this is not something that your financial institution can possibly catch at the time of settlement, it is up to an your core processor to identify which items are authorized (where no fee is assessed) among all of the transactions that impact the available balance.nnFor institutions that partner with a core processor that has the capability to automatically identify authorized transactions and mark the item u201cfee or no feeu201d when the item is authorized, the issue is avoided. But if the core does not provide a solution for the problem u2014 or offers a module that attempts to correct the problem but finds that the module is not consistently reliable u2014 then the institution must refund any fees that are assessed in error as soon as the issue is identified.nnUncovering fees charged in error may be identified through periodic account reviews or in response to account holder requests for refunds. However, the situation is discovered, fees charged as a result of positive swipe/negative settlement must be refunded to remain in compliance.nnFailure to address violations of the UDAP policy can result in fines, regulatory orders to refund fees, and damage to account holder relationship and reputation if the issue is made public. Keep in mind, it doesnu2019t take long for an unhappy account holder to share a bad experience with family, friends, colleagues and beyond through social media.nnu003cstrongu003eWhen resources and disclosure align, the problem is solvedu003c/strongu003ennThe majority of legal actions related to POS transaction fees result from the absence of clear disclosure involving the use of available balance u2014 leaving the consumer unaware and uninformed. The good news is, the problem is fixable.nnA long-term solution requires ongoing knowledge of the most current regulatory expectations, as well as alignment with appropriate, up-to-date technology and analytics; and internal systems and processes that allow personnel to address the issue in a timely manner.nnFor institutions that lack the expertise, tools or resources to adequately handle fee issues related to positive swipe/negative settlement, a provider that specializes in overdraft solutions can monitor the situation, provide enhanced program solutions and disclosure procedures and messaging to help avoid the possibility of any regulatory violations.nnIn a constantly changing environment, distractions and opportunities come from every direction. And sometimes it can be difficult to stay on top of the daily routine responsibilities while juggling new initiatives and unexpected situations. But donu2019t let outside influences and competitive challenges distract you from important on-going operational and regulatory issues, if you want to consistently maintain exceptional performance and service and avoid any regulatory concerns.nnu0026nbsp;nnu0026nbsp;nnu003chr /u003ennu0026nbsp;nnu003cstrongu003eABOUT THE AUTHORu003c/strongu003enCheryl Lawson is executive vice president of compliance review for John M. Floyd u0026amp; Associates. She serves as JMFAu2019s principal compliance liaison for regulatory requirements of overdraft services, including consumer protection issues, and strategies that enhance safety and soundness. Learn more aboutu00a0u003ca href=u0022https://www.jmfa.com/About-JMFA/Executive-Team#lawsonu0022u003eCherylu003c/au003e.nnu0026nbsp;nnu003cstrongu003eABOUT JOHN M. FLOYD u0026amp; ASSOCIATES (JMFA)u003c/strongu003enJMFA is considered one of the most trusted names in the industry helping community banks and credit unions improve their performance and profitability. Whether itu2019s recovering lost revenue, uncovering savings opportunities, serving your account holders better or offering a 100% compliant overdraft programu2014JMFA has the right solutions to help you deliver measurable results. We are proud to be a preferred provider among many industry groups. To learn more pleaseu00a0u003ca href=u0022https://www.jmfa.com/About-JMFA/Contact-Us-Todayu0022 target=u0022_blanku0022 rel=u0022noopeneru0022u003econtact your local representativeu003c/au003eu00a0or call us at (800) 809-2307.


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