The connotation of the word, fee, has always been bad. The same could be said when you add overdraft in front of it. Death to overdraft fees has been a common theme in the news lately. Notably, a handful of mega banks are eliminating them while others are instituting other forms of low balance warnings. While the overarching idea of overdraft fees are changing, they aren’t going away completely, and four key advantages of keeping them around speak for themselves.
Four Benefits of Overdraft Fees
- Providing Liquidity for Consumers
Overdraft fees allow financial institutions to provide liquidity for their consumers. As a practical, common example, a consumer is at the grocery store to purchase food for their family. Upon checking out, the consumer’s payment is declined due to insufficient funds, resulting in the consumer either leaving empty-handed or only with the bare essentials. Instead, with overdraft protection, the consumer can pay for their groceries, even with limited funds, because the financial institution has risk protection in place to cover the purchase.
If financial institutions were to eliminate overdraft fees, financial institutions simply wouldn’t allow consumers to overdraw their funds. Without overdraft protection, there is increased risk for financial institutions. Financial institutions would assume the risk of paying items into overdraft when they receive no compensation (no overdraft fee) for that risk. If financial institutions aren’t being compensated for covering overdraft, the emergency source of liquidity that overdraft protection provides will no longer be a resource available to consumers.
- Economic Stimulus
According to the American Bankers Association, overdraft fees provide an annual stimulus to the economy of $65.6 billion. In addition, consumers lose $443 in purchasing power for each returned check or ACH transaction. Overdraft protection allows for consumers to maintain their purchasing power while stimulating the economy. Standing at the brink of a recession, reducing the $65.6 billion in economic stimulus that overdraft fees provide would significantly hinder the economy. Getting rid of overdraft fees and the economic stimulus they provide during a possible recession could backfire when the economy needs as much help as it can get.
- Financial Inclusion
Eliminating overdraft protection would significantly reduce financial inclusion, especially for low-income consumers. In most cases, low-income accountholders can open free or low-cost checking accounts because overdraft fees (the majority being paid by higher income members) subsidize what would have been the cost of opening those accounts.
If overdraft fees are nonexistent, different fees may arise to compensate for financial institutions’ losses in revenue from overdraft fees. For example, financial institutions may begin charging accountholders monthly fees just to have a checking account – a cost that could result in low-income consumers being pushed out of the banking system.
- Non-Interest Income
Overdraft fees help drive non-interest income. An example of this is Velocity’s Account Revenue Services (ARS). ARS looks at a financial institution’s consumer base and segments accountholders into buckets based on engagement. Accountholders then receive communications to engage them more with the financial institution. Only a fraction of accountholders is typically highly engaged. Using a combination of data science, analytics and flexible creative strategies, the Account Revenue Solution® (ARS) program helps financial institutions improve performance and engagement at each stage of the checking account life cycle.
Debunked Misconceptions about Overdraft Fees
- Customers Aren’t Complaining: Only 0.15% of complaints to the Consumer Financial Protection Burau were in relation to overdraft fees.
- People Don’t Want Overdraft Fees to Disappear: A study done by Morning Consult found that approximately 50% of Americans believe overdraft fees are fair. Research done by Curinos suggests that two-thirds of consumers indicate that they don’t want to see reductions in their access to the service, even though fees can be costly.
- The “$40 Coffee”: It is a common phrase associated with overdraft fee dissent, and it no longer holds as much truth. Curinos found that the average size of purchases that trigger overdraft fees isn’t that $4 cup of coffee. Rather, larger purchases upwards of $200 are causing consumers to overdraft on funds.
- The Lower Income Misconception: A research paper commissioned by the American Bankers Association debunked the theory that lower-income consumers are the ones getting hit by overdraft fees the most. In reality, lower-income households averaged 10 items paid into overdraft a year versus 18 items for higher-income customers.
Overdraft Solutions
Offer your consumers the benefits and peace of mind that comes with overdraft protection. We offer a turnkey solution that is designed to help you facilitate pre-collection and collection efforts, identify risk and excessive use by your consumers, and manage your communications, all while ensuring regulatory compliance for your organization.
Our overdraft services also provide you with automated tools and technology to manage overdraft services as a line of business; something that is critical in today's regulatory climate and competitive environment.
Learn more about Overdraft Solutions.