Earlier this year, the Consumer Financial Protection Bureau (CFPB) announced it would push back its rulemaking process tied to overdrafts from July to October. But October has come and gone, and so the wait continues…
In fact, it is widely believed that even if the CFPB had made decisions in October, an effective date on rule-making would be no earlier than mid-2017. So not only does the waiting continue… it could go on for more than a year!
But just because the CFPB cannot decide if overdraft protection programs need further regulation, doesn’t mean your financial institution should sit by idly, waiting to react. Wise financial institutions are reviewing their current overdraft programs and making sure their houses are in order. If your overdraft provider has not approached you to conduct such a review, it may be time to look for a new provider; because some aspects of overdraft management just can’t wait.
Service Cannot Wait.
One thing all financial institutions know--regardless of what the CFPB may do--is that there is a small percentage of accountholders who rely on overdraft protection as a short-term liquidity source. In fact, a recent study published in October 2015 by Novantas reveals that the majority of overdrafts (92%) are the result of informed consumer choice or were easily avoidable.
The take-away for financial institutions: now is the time to ensure you are delivering the overdraft service your accountholders want. A review of your overdraft program could reveal potential areas of improvement in how and where you deliver the service and how and when you communicate to your accountholders. Modern overdraft services help customize this communication and ensure delivery at multiple channels. After all, if your financial institution won’t meet the consumers’ needs, they will be happy to go elsewhere.
Income Cannot Wait.
Doesn’t a program that can account for the majority of your service fee income deserve your attention? A review of your overdraft service can help retain, or even maximize, this important revenue source, despite the fact that overdraft income is declining as a whole.
The fact is, the financial landscape has changed significantly in the past 15 years since the first overdraft protection programs were installed. Unfortunately, there are too many providers that helped financial institutions implement set-it-and-forget-it, one-size-fits-all overdraft services back then, with no annual reviews or even periodic tune-ups since. As a result, many institutions assume income opportunities no longer exist, but that is simply not the case.
Changes in technology, for instance, now allow banks and credit unions to more efficiently and effectively communicate to their accountholders about their short-term funding options and enroll them in the service if desired. Likewise, the ability to now adjust overdraft limits dynamically can have an enormous impact on income by delivering the service to more accountholders who have the ability to repay.
Compliance Cannot Wait.
And finally, and probably most importantly, are you 100% sure your overdraft service is completely compliant as it stands today? A program that has not been reviewed in years is potentially at risk.
One area of concern could be the way your financial institution pays your overdraft provider for its service. Specifically, the American Bankers Association (ABA) has warned that paying third-party overdraft providers based on incentive compensation (“pay-for-performance”) is generally inconsistent with promoting the responsible use of these programs.
As for the potential CFPB changes to overdraft regulations, a June 5, 2015 bloomberg.com article cites two CFPB employees who say the Bureau is leaning against issuing tough new rules on banks that would limit the number of charges or the frequency they can impose them on consumers. Instead, according to the sources, the Bureau is considering improving opt-in disclosure policies, as well as governing the order in which banks process transactions. Regardless, your overdraft provider should be prepared to make any and all changes the CFPB requires, as well as advise on you their implications.
Stop waiting and take action now to address the overdraft concerns that cannot wait and prepare for the ones to come.
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