Most financial institutions acknowledge that overdraft fees represent a remarkable source of non-interest income. What may not be clear to some is the fact that overdraft privilege programs are more than just a source of revenue. Recent data suggests that the service offers as much of a benefit to the consumers who use it as it does to the institutions that provide it.
Consumer Financial Protection Bureau (CFPB) director Richard Cordray has said on many occasions that his agency is not looking to do away with overdraft services (but is instead leaning toward minor changes in how institutions manage the programs). As such, it doesn't appear overdraft programs are going away.
So how should community institutions view overdraft privilege in the current environment?
The first place to start is by learning the truth about the benefits the service provides. Armed with the facts, your financial institution can make a well-informed decision about whether to provide such a program. Or if you already offer it, you can shift your focus from viewing it as a punishment to educating consumers and personnel about its benefits.
Here are some common myths about overdraft privilege, and the truths that debunk them:
MYTH: The majority of Americans overdraft each year.
FACT: In a given year, approximately only 25% of account holders experience an overdraft. As such, it is only a small percentage of consumers who look to overdraft programs to help them when they are in a bind. The rest of consumers use other options, such as credit cards, payday lenders or even pawn shops. But, the question remains: if even a handful of consumers need this service, shouldn't we strive to honor their overdraft items (provided they have the ability to repay)?
MYTH: It is the poor who overdraw their accounts the most.
FACT: People from all economic brackets experience overdrafts from time-to-time. Yet, the account holders who overdraft their accounts the most often are also the ones who deposit money into their accounts most often. They also deposit higher dollar amounts than those who rarely overdraft. Our data shows that people who overdraft ten or more times in a given year have monthly deposits that range from $3,500 to $6,000. These frequent and large deposits give them the cash flow they need to pay for the convenience of the service.
MYTH: Most debit card transactions that trigger an overdraft fee occur while consumers are buying coffee or other small-ticket items.
FACT: Our research shows that the bulk of debit card transactions that result in overdraft fees occur in grocery stores, vehicle repair shops, and at gas stations—NOT in coffee shops, as some in the media would have you believe. A recent Bankrate.com (NYSE: RATE) report states that almost two in three Americans don't have enough savings to pay for a $500 car repair or a $1,000 emergency room bill. When emergencies happen or funds fall short, consumers seek short-term liquidity options. If your institution does not provide it, they will look elsewhere.
MYTH: Banks and credit unions assess overdraft fees as a punishment.
FACT: Financial institutions charge overdraft fees as a way to cover the cost of providing the service to consumers. Overdraft protection allows millions of consumers to pay their mortgage, rent and insurance payments, buy food and tend to their medical needs. Financial institutions assume risk in providing this service and charge off millions of dollars per year in losses when consumers do not repay their overdrawn balances. It is appropriate to charge a fee for assuming this risk and providing the service. Revenue from overdraft fees is important to financial institutions to fund technology and other services account holders demand, such as online banking, mobile access, etc.
Despite any future changes the CFPB may enact, the fact remains: there will always be a small percentage of account holders who rely on their institution for this form of short-term liquidity. Those institutions that champion the service aspect of the program can provide a valued benefit to consumers and preserve this important revenue source.