Banks Get Pitches on Overdraft Protection
From: "Banks Get Pitches on Overdraft Protection" Wall Street Journal, Robin Sidel, 7/29/10
Bad spending habits like overdrawing a checking account are good for banks, and for technology and marketing companies trying to help them preserve billions of dollars in overdraft fees.
The companies promise to help financial institutions identify customers who are most likely to incur the hefty fees ahead of new federal overdraft rules taking effect Aug. 15. Issued by the Federal Reserve, the rules require customers to sign up for a bank's overdraft program before the bank can charge the customer for overdrawing the account. As a result, many banks are racing to persuade customers—especially those who incur frequent charges—to join their programs.
"The clock is ticking … you know that … so how will you get stubborn overdraft users to opt-in? Have you even started?" Acton Marketing LLC asks of potential bank customers on its website. The consulting firm and direct-mail company is pitching banks on a number of overdraft programs, including results of a consumer survey that it sells for $795.
The new rules apply to debit-card withdrawals made at automated teller machines and store cash registers. Starting next month, people who overdraw their accounts and haven't opted into a bank overdraft program will see those charges rejected. The rules don't apply to certain electronic transactions, such as automatic bill payments.
At stake are the more than $37 billion of fees related to overdraft payments last year, according to Moebs $ervices Inc., a Lake Bluff., Ill.-based company that tracks such data. About half that came from ATMs and debit-card charges. Banks charge an average of $27 for an overdraft fee, according to Moebs.
In recent weeks, banks have been barraging customers with emails, letters and telephone calls to encourage them to sign up for overdraft protection. About a quarter of bank customers recently surveyed by Nielsen Co. expressed interest in participating in bank overdraft programs.
Banks are most interested in getting frequent overdraft users to sign up for their programs. That is because roughly 75% of overdraft fees are generated by less than 20% of bank customers, according to industry statistics.
In March, more than 200 banks paid $199 each to participate in an Internet seminar hosted by David Peterson, a banking-industry consultant who advises banks to consider bundling overdraft protection with other services for a monthly fee. A 40-page presentation that accompanied his lecture includes a profile of a typical overdraft user, described as a person who doesn't pay attention to account balances, lives paycheck to paycheck, and will engage in a transaction despite knowing it will generate a fee.
The seminar also includes several pages detailing the "five stages of overdraft grief," which includes "shock and denial," "pain and guilt," "anger and bargaining," "depression" and "acceptance."
"I am helping banks to understand how the different types of customers are going to receive this message and how they should comply with the law," said Mr. Peterson.
Most of the marketing efforts are aimed at small banks and credit unions, which often don't have sophisticated technology to analyze the habits of their overdraft customers.
Gary Gabelhouse, a senior research analyst at Acton Marketing, says the Lincoln, Neb.-based company is creating marketing and direct-mail programs for thousands of banks in order to increase the number of customers who opt in to their overdraft programs. The pricing varies; if a bank has 10,000 customers, Acton might charge as much as $9,000 for mailing overdraft letters and forms on behalf of the bank. "The biggest threat to the banking business is not having the right or wrong program, but getting the heavy overdraft users to respond," Mr. Gabelhouse says. "Heavy overdraft users will pay almost anything."
Such programs haven't tempted Kevin McPhaill, chief banking officer of Sierra Bancorp, which has about two dozen branches in California that operate as Bank of the Sierra. Mr. McPhaill says he has received a handful of calls from companies pitching their overdraft expertise.
"We didn't really care for their approach, and they're very expensive," he said, adding that the bank has gotten more than 90% of its overdraft users to join its program.
Such pitches have also attracted attention from consumer groups, who say people shouldn't be encouraged to join overdraft programs.
"These companies are targeting the vulnerable. While it isn't illegal, it is really an inappropriate product," says Leslie Parrish, senior researcher at the Center for Responsible Lending in Washington.
Consulting company Convergys Corp., which advises banks on how to get new customers and collect on bad debts, suggests financial institutions warn customers about the "negative experience" that they could encounter if they don't opt in to an overdraft program.
"We want our clients to create a proactive strategy to determine those [customers] who might stand in line at the grocery store with their children, pull out their debit card and get declined," says Angela Crawford, director of strategy for Convergys's financial-services group.
The company hasn't signed up any customers for its customized overdraft service, but some regular clients have expressed interest in it, she says.
Written By: rnybeck
Date Posted: 8/25/2010
Number of Views: 2332