Formal discretionary overdraft programs—despite their past stigma—are a topic for consideration again for financial institutions. I draw this conclusion based on the hundreds of conversations I have had over the past several months with financial executives while attending and exhibiting at various industry trade shows and conferences.
It seems many institutions that had previously adopted a 'wait and see' stance about implementing a discretionary overdraft program are moving forward in doing so. Some executives said the encouraging news coming from the CFPB is their impetus to modernize. Other institutions simply realize their programs are outdated, inefficient and need to be updated in order to provide exemplary service and generate new income.
One of the most basic elements of an updated, modern overdraft system—if not the most important component—is the customization of individual overdraft limits determined by an account holder's ability to repay. These so-called Dynamic Overdraft Limits have resonated with industry executives as they learn the tangible benefits they can provide.
Why Dynamic Overdraft Limits?
For years, most formal discretionary overdraft programs included a fixed overdraft limit based on account type (say, $500 for Free Checking or $750 for Premier) for each account holder who qualified to be in the program. These limits were set without taking the individual's particular financial situation into consideration. If the account holder could afford a higher limit, it was not available; conversely, if he could not afford to repay the $500 overdraft limit, he was allowed it anyway.
Assigning overdraft limits based on a person's ability to repay the overdraft plus any associated fees not reduces risk for your financial institution. It also helps you meet federal regulatory guidance, which requires financial institutions to monitor the “individual credit worthiness of account holders" and make plan adjustments “to ensure that credit risk remains in line with expectations.”
This ongoing monitoring requires financial institutions to utilize advanced algorithms that analyze account holder data on a daily basis, alerting you when action is needed, such as adjusting overdraft limits, suspending the service, suggesting counseling, etc.
Outdated overdraft systems simply cannot provide this level of sophistication.
Dynamic overdraft limits help your institution:
- Manage risk for higher charge-offs
- Justify overdraft limits to regulators
- Generate additional fee income as you strive to pay more overdrafts for account holders who can afford to repay, while helping them meet their short-term funding needs
- Avoid offering an account holder access to an overdraft limit when he/she is not in a financial position to repay it
Dynamic overdraft limits are an integral part of an updated, compliant discretionary overdraft program. Other essential components include, the ability to track debit card transactions denied for reason of NSF, custom and automated account holder communications, and robust and detailed reporting for compliance and optimized performance.
For more information about Dynamic Overdraft Limits, visit these resources:
- WHITE PAPER: The Dramatic Evolution of Automated Overdraft Systems
- BLOG POST: Dynamic vs. fixed overdraft limits: And the winner is…?
BROCHURE: Compliant Courtesy Overdraft Management