The devil is in the details: Overdraft program charge-offs

Posted by Jeff Harper, President, BSG Financial Group on Jul 10, 2017 9:51:21 AM

It has been said that the “devil is in the details,” meaning paying attention to small things is important and can lead to positive rewards. Although this idiom applies to many facets of business and life, we find it particularly pertinent to the performance of your institution’s discretionary overdraft program.

All too often, institutions (and their third-party program providers) let their overdraft programs run on ‘auto-pilot,’ without analyzing program data and key performance metrics. However, it is in these details–which should be tracked consistently and reviewed annually–that you can unearth valuable service and income opportunities.

One of these key performance metrics is the NSF Efficiency Ratio, which measures Gross Overdraft Charge-Offs (principle + fees) compared to Overdraft Revenue. It is common for institutions to measure overdraft revenue (in fact, many providers require it in order to get paid!), but tracking this number alone does not reveal the income you are forfeiting due to charge-offs. Tracking overdraft charge-offs can indicate whether your institution is setting overdraft limits properly and/or if you are applying the correct risk tolerances.

Watch a segment of our educational webinar about the importance of tracking overdraft charge-offs:

A high NSF Efficiency Ratio may indicate that you need to make changes to mitigate charge-offs; OR, when low, you may need to assess if your institution is taking enough risk in your overdraft decisioning. Your third-party overdraft provider should provide this data to you along with guidance in analyzing it.

Many institutions have asked us during the annual program review we provide to each client, “What should the NSF Efficiency Ratio be?” Our answer is, “What do you want it to be?” If these were loan charge-offs, you would know the tolerances and would track and monitor them in order to better manage them.

Measuring charge-off ratios is just one of the many program details that your institution (or third-party overdraft provider) should track. Other key performance metrics include:

  • Overdraft Limit Calculation Strategy
  • Overdraft Activity by Payment Channel
  • Reg E Opt-Ins and Debit Denials
  • Counseling Strategies & Communication

To learn more about the key performance metrics you should monitor, watch the ON-DEMAND WEBINAR, “What Has Your Overdraft Provider Done for You Lately?

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