We asked one of our bank customers who recently implemented dynamic limits if doing so created confusion for the customer. “I'll be honest,” said Lynn Murray, Chief Administrative Officer with the Bank of Floyd, in southwest Virginia, “Moving our customers from a fixed limit where they know their overdraft limit to a ‘strive-to-pay’ approach, where the limit moves, has been a non-event for our customers.”
“We have actually found it was a much bigger event, or ‘hand-wringer,’ for our employees, who were concerned about making that change,” she said.
According to Lynn, employees were concerned about consumer backlash and feared having to explain the new procedures. “For us, it wasn’t a question of the customers making an adjustment; it was more of an internal staff adjustment and the bank’s need to reset their perspective on overdrafts."
The conversation with customers about dynamic limits should, in fact, be a welcome discussion. Here's why: in moving from fixed to dynamic limits, your financial institution is demonstrating greater responsibility in meeting the needs of your accountholders. You now strive to pay more overdrafts for those who have the ability to repay, while paying fewer for those who do not. You are more diligently monitoring an individual’s ability to repay their overdrafts and adjusting limits for each customer as the customer’s situation changes.
Alternatively, using a fixed overdraft program that assigns a “one-size-fits-all” limit can deny coverage to customers who deserve and appreciate the additional protection. Worse, it can leave customers with limits far beyond their ability to repay, which poses a potential risk for both the customer and the institution.
It is our experience—gained through providing dynamic overdraft limits (and/or converting them from fixed limits) to hundreds of thousands of accountholders—that those consumers who overdraft regularly are, in fact, most concerned that the financial institution will continue to meet their funding needs.
Let us explain:
Accountholders who overdraw their account in any given year fall into two distinct categories: One-time or light users (up to 9 overdrafts items), and frequent/regular users (10 items or more). The majority of Americans (and financial institution accountholders) fall into the first category; while, on average, frequent/regular users comprise only 5%-10% of a financial institution's population.
According to the October 8, 2015 Novantas survey, “Understanding Consumer Choice: A Review of Consumer Overdraft Behaviors,” the one-time/light users represent only 8% of overdraft items and users cited their reasons for overdraft as bank error or “other.” Put another way, the overdraft was unintended or accidental; in this case, knowing the overdraft limit is immaterial, as they do not intend to overdraft again.
The second group of overdrafters (frequent/regular users) is vastly different from the first group in both number and mindset. These accountholders, although only a small subset of total accountholders, comprise 70%-85% of a financial institution’s total overdraft volume.
Individuals in this group are aware of what they are doing, trading off the cost of obtaining short-term funds for benefits such as payment, speed, convenience and access. The Novantas study backs up this assertion, reporting that 92% of overdrafts are avoidable. In fact, the majority of respondents said:
- I knew my balance was low and I used OD to make sure my payment went through (36%)
- I knew I was running low and I hoped my deposit would make it before my purchase went though (30%)
The Novantas study concludes that accountholders in this category are making an informed consumer decision; one that is based not solely on a single overdraft limit, but on a variety of factors, including:
- Overdraft Limit
- Current Balance
- Overdraft Fee
- Amount of Debit About to be Transacted
- Outstanding Items (that have not cleared)
Clearly, these consumers are knowingly overdrafting in order to facilitate a "convenience lifestyle." So the question becomes: Do these accountholders want to know the exact overdraft limit at the time of a transaction? Our experience tells us ‘no;’ they simply want their items honored or paid.
Does your Financial Institution Provide Dynamic Limits for Accountholders?
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