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Overdraft management that just makes sense for everyone

Deposit accounts for everyone

Over the last several years, the Consumer Financial Protection Bureau (CFPB) has, not so quietly, been actively pushing for changes in how banks decision applicants for new checking accounts.  Recent activity by the CFPB is accelerating the pace of this change for those managing deposits-gathering activities within regulated financial institutions.  It is imperative banks begin adopting modern technology and product strategies that are designed for a digital age instead of an age before the internet even existed.
In October 2014, the CFPB hosted the Forum On Access To Checking Accounts to push for more transparent account opening procedures, suggesting that bank’s use of “blacklists” that effectively “exclude” applicants from opening a transaction account are too opaque.  Current regulatory trends are increasingly signaling the need for banks to bring checking account originations strategies into the 21st century as I indicated in Banking in the 21st Century.  The operations and technology implications for banks must include modernizing the approach to account opening that goes beyond using different decision data to do “the same old thing” that only partially addresses broader concerns from consumers and regulators.  Product features attached to check accounts, such as overdraft shadow limits, can be offered to consumers where this liquidity feature matches what the customer can afford.

Banking innovation calls for deposit gatherers to find more ways to approve a basic transaction account, such as a checking account, that considers the consumer’s ability to repay and limit approving overdraft features for some checking accounts even if the consumer opts in.  This doesn’t mean banks cannot use risk management principles in assessing which customers get that added liquidity management functionality attached to a checking account. It just means that overdraft should be one part of the total customer level exposure the bank considers in the risk assessment process. The looming regulatory impacts to overdraft fees, seemingly predictable, will further reduce bank revenue in an industry that has been hit hard over the last decade.  Prudent financial institutions should begin managing the impact of additional lost fee revenue now and do it in a way that customers and regulators will appreciate.

The CFPB has been signaling other looming changes for check account regulations, likely to accelerate throughout 2015, and portend further large impacts to bank overdraft revenue.  Foreshadowing this change are the 2013 overdraft study by the CFPB and the proposed rules for prepaid cards published for commentary in December 2014 where prepaid account overdraft is “subject to rules governing credit cards under TILA, EFTA, and their implementing regulations”.  That’s right, the CFPB has concluded overdraft for prepaid cards are the same as a loan falling under Reg Z.  If the interpretation is applied to checking account debit card overdraft rules, it would effectively turn overdraft fees into finance charges and eliminate a huge portion of remaining profitability for banks from those fees.

The good news for banks is that the solution for the new deposits paradigm is accomplished by bringing retail banking platforms into the 21st century that leverage the ability to set exposure for customers at the client level and apportioned to products or features such as overdraft.  Proactively managing regulatory change, that is predictable and sure to come, includes banks considering the affordability of consumers and offering products that match the consumer’s needs and ability to repay.  The risk decision is not different for unsecured lending in credit cards or for overdraft limits attached to a checking account.  Banks becoming more innovative by offering checking accounts enabling consumers more flexible and transparent liquidity management functionality at a reasonable price will differentiate themselves in the market place and with regulatory bodies such as the CFPB.  Conducting a capabilities assessment, or business review, to assess product innovation options like combining digital lines of credit with check accounts, will inform your business what you should do to maintain customer profitability.

I recommend three steps to begin the change process and proactively manage through the deposit industry regulatory changes that lay ahead:

  • First, assess the impacts of potential lost fees if current overdraft fees are further limited or eliminated and quantify what that means to your product profitability.
  • Second, begin designing alternative pricing strategies, product offerings and underwriting strategies that allow you to set total exposure at a client level and apportion this exposure across lending products that includes overdraft lines and is done in a way that it is transparent to your customers and aligns to what they can afford.
  • Third, but can be done in parallel with steps one and two, begin capability assessments of your financial institution’s core bank decision platform that is used to open and manage customer accounts to ensure your technology is prepared to handle future mandatory regulatory requirements without driving all your customers to your competitors.

It is a given that change is inevitable.  Deposit organizations are well served to manage this current shift in regulatory policy related to checking account acquisitions in a way consistent with guaranteeing your bank’s competitive advantage.  Banks can stay out front of competitors by offering transparent and relevant financial products consumers will be drawn to buy and can’t afford to live without!

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