In case you missed out... listed below are BSG Financial Group's five most popular blog posts of 2016. Loads of people have already read them and we wanted to make sure you did too! Take a look to get "in the know" and feel free to pass them along!
Now that the election is over, there is much speculation about how a Trump presidency will impact our industry. Most everything we read is positive, especially about the future of automated overdraft programs.
In particular, we are encouraged by:
- Recent news articles regarding the future role of the CFPB
- Trump's promise to eliminate two regulations for every one enacted, including bank regulations
- A recent Federal Reserve-sponsored webinar that suggested the regulatory bodies are not looking for a major overhaul in overdraft programs, but instead are focusing on the inner workings of an overdraft program.
On Friday, July 22, 2016, the Consumer Financial Protection Bureau (CFPB) published proposed rules and a request for public comment to establish a new consumer regulation that would regulate payday loans, vehicle title loans, and certain high-cost installment loans (“Covered Loans”).
The Bureau is particularly concerned that some lenders of Covered Loans fail to assess the consumer’s ability to repay the loan; it is also concerned with the practice of withdrawing loan payments directly from the consumer’s accounts.
For financial institutions seeking reliable and safe sources of additional fee income, this news is welcome indeed.
The current state of the overdraft industry can be summed up in one word, “WAITING.”
BSG Financial Group hears from some institutions that they are delaying offering an overdraft privilege program until the Consumer Financial Protection Bureau (CFPB) decides how financial institutions must manage consumer and business overdrafts.
This waiting reminds us of a quotation from the novelist Morris West who wrote, “If you spend your whole life waiting for the storm, you'll never enjoy the sunshine.”
We—banks, credit unions and service providers—have all been waiting for more than two years for the regulatory agency to finally announce its conclusions. Now it looks like mid-2018 before any material changes might occur. And even then, the changes recommended by Pew Charitable Trust (hired by the CFPB to handle the research aspects of their regulatory review) seem rather minor: revised disclosures, reasonable fees, and standard posting order.
In the meantime… while we wait, your account holders seek short-term liquidity elsewhere and your bottom line pays the price.
Published on CUInsight.com, April 8, 2016
I think we can agree that there are consumers who need short-term liquidity options. Among several recent studies, the Brookings Institution reveals that one-third of American households live paycheck to paycheck; and American Banker data cites that 54% of checking account customers are in poor financial health.
Financial institutions can provide a valued service by offering a compliant overdraft privilege program to help these individuals manage unexpected, ill-timed expenses. In fact, a recent study by Novantas said that 66% of overdrafts occur when consumers knew they have a low balance, but want the payment to go through anyway.
So how does your financial institution offer a cost-effective service without encouraging reckless behavior? A good place to start is to review how your third-party overdraft vendor is compensated, which can affect the way the program is viewed by regulators and how it is executed vis-a-vis account holders.
by Jeff Harper, BSG Financial Group
Published on CUInsight.com, March 14, 2016
Never before have financial institutions been under the type of scrutiny they are today. Regulations and guidance imposed by the OCC, FDIC and the CFPB have forced institutions to not only monitor their overdraft protection programs more closely, but to also justify their very existence. Still, it is possible to balance the rewards of providing this short-term liquidity service with the financial and compliance risks it can pose, but it requires a new level of expert analysis and automation.
Gone are the days of the “one-size-fits-all” overdraft programs where all accountholders of a particular account type received the same overdraft limit. Institutions today must rely on more advanced algorithms and accountholder data to guide them in setting the correct overdraft limit, on the correct day, for the correct person. Without this level of sophistication, financial institutions put themselves not only at risk with regard to income and customer service, but at a loss when explaining to regulators why they paid certain items for an accountholder when the accountholder clearly did not have the ability to repay the overdraft.
Automatically Set Dynamic Limits
Modern overdraft management software can provide automated scoring capabilities that actively manage risk and keep your overdraft program compliant. Far from the “one-size-fits all” approach to setting overdraft limits, automated and dynamic scoring enables your institution to create a risk profile on a daily basis for each individual accountholder and assign an overdraft limit based on that accountholder’s ability to repay. Dynamic limits can be calculated automatically based on a multitude of accountholder data points, including specific deposit and overdraft activity, as well as related balances and more.
The ability to set dynamic limits, lets your institution provide accountholders with a personalized overdraft pay service based on repayment capacity. Institutions maximize service by paying/authorizing more items for those accountholders who can afford it and want to use it, while pulling back on overdraft limits for those accountholders whose ability to repay has diminished. The financial institution is able to approve more overdrafts to maximize service; incur less risk with fewer charge-offs; and save time making fewer pay/return decisions. A win-win for everyone.
Satisfy Regulator Guidelines
Regulators expect financial institutions to monitor changes in customer usage to identify risks and to detect “potential changes to repayment capacity with respect to the overdraft product.” Automated risk scoring allows your institution to monitor “the individual credit worthiness of accountholders” and customize the service to meet their ability to repay.
In addition, regulators have also stated that management “should exercise appropriate oversight through receipt and review of regular reports.” Your overdraft program should provide automated reports that track and monitor excessive overdrafts, for instance, so you can immediately make appropriate plan adjustments as well as communicate to accountholders their program status.
Do It in the Cloud
The type of automated overdraft software that is easiest to maintain is one that is cloud-based. This type of software delivery also provides security, ease-of-use and potential cost savings by eliminating software seat licenses, upgrade expenses, etc.
Benefits of a cloud-based overdraft software include:
- Nightly updates and upgrades that occur automatically with NO impact on your financial institution’s IT staff.
- Security back-ups, software upgrades, secure file transfers and server maintenance that no longer are your financial institution’s burden.
- Complete compliance with multifactor authentication to meet regulatory requirements.
Automating your overdraft system helps your financial institution reap the monetary rewards of providing this much-appreciated customer service, while minimizing charge-offs and regulatory scrutiny. Your accountholders appreciate your ability to meet their short-term liquidity needs and your institution is able to make sure their limits match their ability to repay.
In April, 2014 BSG Financial Group helped STAR Financial Bank “re-launch” its overdraft privilege service, having previously offered a competitive vendor’s program since 2002. Patrick Burch, vice president, deposit administration officer, joined STAR Financial soon after the implementation was complete and has since been responsible for managing the service, optimizing its performance.
You see, the experts at Haberfeld–as do we–disagree with much of the analysis being published about overdrafts, especially from organizations like The Pew Charitable Trust and the Consumer Financial Protection Bureau (CFPB) that are looking to further regulate or even eliminate this service.
We can think of no better day than Martin Luther King, Jr. Day to reflect on equality. And while many people this week ponder equality in terms of race, religion or even sexual orientation, we think it also applies to the banking world—specifically to equality in overdraft management.
We're not sure if it's a trend or merely a coincidence, but there have been quite a few articles in the trades recently that paint overdraft protection in a more positive light than usual. We think it is beneficial to share these articles that substantiate our belief that overdraft protection programs are, in fact, helpful to many consumers in meeting short-term liquidity needs. Further, the majority of consumers who access overdraft privileges do so as the result of an informed and conscious decision.