Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewmore on overdraft fee income
Sean Ryan and I have been friends for ages. He is one of the wittiest and most insightful industry observers I know. In his blog on SNL’s site he mentioned yet another blogger and opined on overdraft fees. I very much agree with his insights and would like to share them with you, as well as add my two cents.
“The post (from another blog) points out something that is frequently overlooked (it has been by me, anyway!) despite being fairly obvious, which is that for banks, the election of the overwhelming majority of their customers is irrelevant. The only customers whose opt-in is of real significance is the roughly one-in-seven customers industry-wide — the figure appears to be materially higher at a small number of banks — who actually overdraw their accounts with any frequency. AB NOTE: THE ACTUAL NUMBER IS ABOUT 30%. 70% OF CUSTOMERS ON AVERAGE NEVER OVERDRAW.
As these customers decide whether or not to opt in, we will see not only how big a hit bank fee revenues stand to take in the short term, but also what may be very interesting data on such consumers' revealed preference for the availability of short-term, high (annualized) cost credit.
I think the distinction about the short-term impact on fee revenues is important. We know the new rules will reduce overdraft fee revenue, though not precisely how much. Yet that will be just the first bite of the apple. The as-yet-unnamed head of the Consumer Financial Protection Board will have enormous discretion over banks' overdraft practices, and depending on whom that head turns out to be, overdraft revenues could be curtailed by far more than is currently envisioned. AB NOTE: THERE IS YET ANOTHER BITE AT THE APPLE FOR THE BANKS AS WELL, WHICH IS WHEN THE CUSTOMER OVERDRAWS AND THEIR DEBIT CARD IS DECLINED FOR THE FIRST TIME. THIS IS THE BEST MARKETING OPPORTUNITY BANKS WILL HAVE TO OFFER OPT-IN AND OTHER OVERDRAFT PROTECTION PRODUCTS TO THE CUSTOMERS WHILE THEY WIPE THE EGG OFF THEIR FACE.
Maybe more interesting will be the broader implications of whether or not frequent overdraft users opt in.
For those of us who enjoy the luxury of not living hand-to-mouth, it seems obvious that overdrafts represent a horribly expensive form of short-term credit. They also pose a real risk of inflicting a crippling cascade of overdraft charges on customers who can ill afford them.
But these customers aren't children; they are free-born citizens of the republic. So, in a sense, their decision to opt-in or not may substantially delegitimize either the bank industry claims that overdrafts are a helpful service desired by customers, or the consumer advocate claims that overdrafts represent predatory behavior toward a vulnerable group.
If overdraft users decisively opt in, then it seems reasonable to infer that, despite the cost, customers with little or no economic cushion desire the easily available credit. It may be economically suboptimal in comparison with other options, but unless one is prepared to argue that one in seven bank customers should be wards of the state, then banks will have largely been vindicated. AB NOTE: I STRONGLY AGREE. THE FIRST HARBINGER OF THINGS TO COME IS THE STAGGERING OPT-IN RATE OF NEW CUSTOMERS (98% FOR MANY BANKS, BUT ONLY 50% FOR THE AVERAGE). THIS IS AN INSURANCE PRODUCT THAT’S FREE UNTIL USED, AND THEY LIKE THAT FEATURE VERY MUCH!
On the other hand, if such customers largely decide not to opt in, electing a form of enforced self-discipline over greater flexibility, then it may discredit industry arguments and even provide the impetus for yet another round of increased regulation, be it by legislators or regulators.
The decisions of these customers on overdraft protection may also be viewed as a referendum by proxy on other high-cost forms of short-term credit such as payday loans and refund anticipation loans. At least, advocates are likely to treat them as such to the extent that their preferred position is vindicated.
AB NOTE: SO STAY TUNED, READERS, SINCE THE TOP IN BATTLE HAS ONLY JUST BEGUN. LAST POINT: LET’S BE CLEAR ABOUT ONE THING: THIS IS NOT ABOUT CUSTOMERS. THIS IS ABOUT POLITICS. MOST CUSTOMERS, PARTICULARLY HEAVY USERS, LOVE THIS PRODUCT AND ARE GRATEFUL FOR IT. WE ALL HAVE RECEIVED THOSE “THANK YOU” NOTES FROM CUSTOMERS WHOSE DEBITS WE COVERED TO SAVE EMBARRASSMENT AND STEEP MERCHANT FEES. THE “STARBUCKS” LAW WAS MOTIVATED BY EGREGIOUS CHARGES INCURRED BY SOME OF OUR FEE HOG BRETHREN, AND THE ABSURDITY OF PAYING, ALL IN, $40 FOR A CUP OF COFFEE. THIS DOES NOT MEAN THAT CUSTOMERS ARE ALWAYS HOODWINKED INTO PAYING OVERDRAFT FEES. THE HEAVY USERS DO SO INTENTIONALLY AS A LIFESTYLE CHOICE. WHILE THIS IS NOT A RESPONSIBLE WAY OF GOING ABOUT FINANCIAL MANAGEMENT, AS SEAN POINTS OUT, THESE ARE ADULTS AND THEY SHOULD BE ABLE TO EXERCISE THEIR FREE CHOICE REGARDING LIFE, LIBERTY AND THE PURSUIT OF FINANCIAL OPTIONS.