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Moebs recommends overdraft services from a consumer perspective

from "Overdraft Service Can Mitigate Risks, Help Profits", by Michael Moebs, American Banker 11/07/03

Many banks and credit unions are introducing fee-based overdraft coverage to make up for low interest rates, shrinking loan volume, and reduced interchange fees. But many institutions that aggressively manipulate overdraft services to enhance non-interest income are coming under scrutiny. Institutions that fail to balance the interests of the consumer with their own can face bad publicity, regulatory censoring, and erosion of consumer relationships. Therefore, according to Mike Moebs, banks and credit unions need to evaluate their current services from the customer perspective. They should consider the following areas:

1. Program definition—determining whether the current service is credit-driven (requiring an implicit agreement with the consumer regarding NSF fees, returned check fees, or daily interest fees) or whether the service is deposit-driven (requiring no agreement because no credit is extended; institutions simply charge a fixed fee to cover overdrafts within the individual limits established for qualified account holders).

2. Qualifications—deciding which consumers qualify for overdraft services must involve more than FICO scores from consumer reporting agencies. Banks can protect themselves from discrimination lawsuits and avoid missing potential revenue from financially responsible consumers by understanding a consumer's ability and inclination to promptly cover bounced checks.

3. Limits—determining if current overdraft limits are truly a meaningful benefit to consumers. Are they high enough to cover multiple low-denomination checks and important monthly payments such as mortgages?

4. Terms—deciding whether policies (including how consumers are notified of overdrafts and how much time account holders have to return their accounts to a positive balance) appear to encourage overdrawn accounts, or if they are in the best interest of the consumer.

5. Fee structure—determining if fees are low enough to create an advantage over competitors while producing significant income from extra volume.

6. IT interface—deciding how overdraft services should be handled: manually or through automated processing systems or third-party software.

7. Communications—making sure fee structures and all terms and limits are easy for consumers to understand.

Written By: rnybeck
Date Posted: 10/24/2005
Number of Views: 2487

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