Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewresponding to nsf/od changes - strategy and tactics
The prohibition on debit card induced NSF charges is a few months away. As a result, many banks have been studying the issue carefully, establishing task forces to handle the anticipated event and taking their time. Bank of America’s announcement that they will do away with debit card NSFs altogether has upset that timeline. Employees and customers are asking: will we do the same?
While BofA’s announcement was rumored to be motivated by the company’s operational inability to execute an opt-in debit card strategy, the message consumers received was: Bank of America is abolishing those heinous NSF charges. This is a brilliant PR spin, turning lemons into lemonade. Reality, though, is different: BofA is shutting out customers from one of the options available to them to overdraw their account.
As you strategize how to respond to this interesting move and what messages you wish to send both your business and consumer clients, consider the facts, strategies and opportunities presented below.
· NSF/OD fees accounted for almost half of checking account revenue stream in 2008, or $36B
· 86% of all banks have at least one NSF/OD program, and 75% of those auto-enroll customers into the program
· Margin-enhancing high balance customers account for 5.6% of all active checking accounts, while fee-generating over-drafters account for 11.7%
· Among SuperCommunity Banks, about 4% of debit card NSF/OD customers account for 50-60% of the NSF income
· Similarly, for all NSF/OD income, about 2-4% of all checking account customers account for 85-90% of all NSF/OD income
· NSF/OD fees account for roughly 32% of all fee income for most banks.
· The average checking account population that incurs NSF/OD fees in 25 SuperCommunity Banks is 23%. Over 75% never overdraw their account.
· Heavy NSF/OD users incur fees at least 5 times a month, with average annual fees $1500-$2000. They average 80 occurrences per year.
· Heavy NSF/OD users:
o No specific demographics. They do not stratify by income, geography or age. They cross all walks of life.
o They are typically loyal customers (average tenure with bank 7 years; average fees $1500 annually).
o In a recent survey 90% of heavy users said it is not the bank’s fault they overdraft so often but their own.
o In the same survey, the majority of heavy users reasoned that paying these fees is the least expensive for them to access cash.
o The common denominator among all heavy users was cash flow issues: they spend more than they have available in cash.
· Expectations among 25 SuperCommunity banks are that this change will cause fee reduction of 20-25%
· Opt-in expectations among top users range between 50-60%; lowest was 40%, highest 75%; my personal guess is that the number will be higher, ;possibly north of 90%
· First and most important question: what is your message? Especially given BofA’s decision to eliminate debit card OD option, many banks opt for putting the customer in the driver’s seat. “The customer will decide how they want their transactions handled”
· Effective segmented go-to market approach is essential. Segment examples:
o Accumulators (high balance customers) – 6% of customers, 21% of checking balances
o Economizers (low balance customers) – 40% of customers, 33% of balances
o Heavy overdrafters (>5 ODs per year) – 11% of customers, 4% of balances, 71% of overdraft fee income
· Appoint both a strategic team and a compliance team, to ensure that the strategy is driven by market-sensitive executives, yet compliance and operations staff and considerations remain in the loop
· Opt –in can be sold as insurance for non-NSF users
· Scare tactics (Chase) – opt in so you can buy your groceries – are not appropriate for most community banks whose message to the customer is: I’m on your side
· Mass enrollment (opt-in for all new accounts); incent bankers for opening new accounts with opt-in (one example: a heavy Free Checking bank achieved 95% penetration)
· Tiered direct mail solicitation (post initial mailer to all customers):
o Habitual users first (followed up by phone calls)
o Top and bottom tiers next
o Mailers including stamped envelope for return confirmation met with much success
· Use internet banking effectively for both notifications and opt-in solicitations
· Use branch calls sparingly, starting with heaviest users
· Customer education, including brochures, situational examples, videos, is very positive. Demystify the process of NSFs with a clear, no nonsense educational message
· Marketing to first time NSF offenders is an important opportunity to cement the relationship, either by waiving this first time occurrence, and/or by cross selling an appropriate product; script your employees to ensure clarity of communication
· Maximizing OD/NSF fee income by tweaking the matrix is what got us here; avoid temptation to continue the pattern
· Should we refund any NSF/OD fees for opt-in customers? I say “no”, but your kinder, gentler bank might feel otherwise
· Payment presentment hierarchy remains an issue. Among your hierarchy options are:
o As received/time sequence;
o Real time (best but very difficult to execute, as most banks process items in a batch mode);
o Sequence electronics vs. paper (difficult to explain logic to customers)
o High to low (despite countless focus groups who affirm the importance of paying large payments first, the reputation risk of this practice remains high)
Major buckets include:
o Yesterday’s items
o Service charges
o Electronic items:
§ Recurring items (bill pay)
§ Online transfers
o Today’s checks
o Debit card items
· Logistics: Need to split your authorized balance information between debit card and check items; this is a new operational requirement that needs to be executed effectively
This change, while painful, can be converted into a relationship building, cross-selling opportunity for both business and consumer customers. Assess the following options for your bank:
· Offer alternative OD linked account protection (savings; credit card; home equity); revise pricing to ensure per occurrence charge
· Increase both consumer and business debit card penetration and activation to boost interchange fee income and customer convenience (use cost effective rewards programs; leverage both credit and debit card portfolios; activation campaigns using lottery basis, if permissible by your state; etc.)
· Realign the checking product line to meet needs of attractive segments:
o Build a cost-effective checking account for fee-averse customers
o Offer a cafeteria of trade-offs to enhance product profitability (e.g. minimum monthly debit card transactions; bill pay; direct deposit; balance levels; automatic savings; etc.)
o Offer a monthly service fee account alternative
Examples of solutions
Here is what other banks are doing.
· TCF – account overhaul. In addition to aggressive marketing of the opt-in option, the bank introduced a new hallmark checking product with maintenance fees. “TCF Convenience Checking” is designed to replace the company’s totally free checking product. Account features:
o Daily fee if balances are negative by more than $% per day
o Negative balance notification on first day by email or mail
o Tiered monthly fees based upon balance levels
· Bank of America – option elimination. The bank has eliminated the option of overdrawing one’s account using the debit card. Observers opine that operational limitations drove this strategy.
· Chase – tweaking product features. Chase did not meaningfully revise its product line. Instead, it eliminated charges at the margin which upset customer the most (avoiding the famous $35 cup of coffee).
· Regions – additional deposit fees. Bank CEO said, “The days of free checking may soon be over”.
Only you know what works for you. This is an opportunity to do good and do well. Overcharging customers en masse is not a viable long term strategy, as we have found out. A narrow customer segment values the option to overdraw their account often. Most customers, though, prefer other solutions. A segmented, customer-centric approach to this situation can pay off dividends both for your customers and, in the longer run, for your shareholders.