"These are the times that try men's souls." This was the battle cry that heralded the American Revolution over 200 hundred years ago. No words are more apropos than these regarding the changes and controversy swirling around overdraft services today.
The landscape for overdrafts is changing dramatically as a result of the Federal Reserve announcement May 2 proposing major regulatory changes. Missed the announcement of these sweeping changes? You are not alone. Because the Fed announced changes relating to credit card, debit card and overdraft services at the same time, overdrafts and debit cards ducked under the radar of both the consumer press and many trade journalists. The comment period on disclosure changes in Truth-in-Savings closed July 18 and by Aug. 4 for opt out and debit card overdraft fee changes in Reg AA.
The major changes proposed include mandatory disclosures of not sufficient funds and overdraft fees every month and year-to-date on checking statements and notices, open communications and advertising, and no more combining ledger and overdraft limits, among many intriguing changes. If you keep consumer interests and your institution's in balance, the changes are beneficial. Otherwise, your overdraft revenue is in for a shake up.
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What the Fed is proposing is unprecedented. Why? Because the proposed regs are market driven. The changes are good for the most part, definitely benefiting the consumer. And, if you are wise, the new overdraft regs will also benefit banks and credit unions. The Fed is effectively imposing stop lights and stop signs for overdrafts and, in return, allowing depositories to price and design according to consumer needs and wants. Pass the stop lights and stop signs, and the overdraft freeway allows unlimited opportunities for improving both revenues and service.
Based on the impending changes, this is the time to drop the price of overdrafts and not sufficient funds. If you lower the overdraft price now, you will win. And, the consumer will win. Don't let the big banks and government dictate what you know is right. Lowering the overdraft and related not sufficient funds price means you understand the microeconomic forces of price and volume. Lowering the price, which is good for the consumer, will increase volume, which will significantly increase overall revenue for you.
Price incentives are the key. Consumers will go to institutions that price competitively. Numerous case studies have proven this. Giving consumers incentives to pay off overdrafts by using instantaneous communications such as encrypted e-mails in the morning and changes in transaction-to-transaction pricing make overdraft services even more appealing.
Bouncing a check costs the consumer $54. This is a combination of the depository charge and merchant charge. Paying the overdraft charge is less than half this. The consumer benefits from overdraft services–and relies on this service, no matter what public relation campaigns from the U.S. Public Interest Research Group, the Consumer Federation of America, the Center for Responsible Lending and other think tanks and advocates tell the press.
Don't be duped or fooled into increasing your price for overdrafts. Do what a few leaders in credit unions and banks have done, lower the price and make the changes to overdrafts a win-win for consumers and depositories.
Mike Moebs is an economist with Moebs Services. He can be reached at 847-615-8048 or [email protected]
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