Saturday, June 6, 2015

Overdrafts Likely to Escape Regulatory Action, But Revenues Falling

The Financial Advisor and Bloomberg articles report on that “Bank Overdraft Fees Escape Tough Rules.”  This follows also our blog post on our May 26th on CFPB rule making plans.  But the good news on likely little new rules is greatly mitigated by another fact:  overdraft revenues are falling.  Our clients show NSF/OD revenues are down over last year, and independent analysts like Ken Usdin at Jefferies documents consumers have better options today for information and alternative to overdrafts.

In fact, overall service charges for banks are falling in total as shown by the chart below, the majority of which are overdraft fees, for community banks under $10 Billion, despite efforts to re-price services.

Overdraft Fees In Millions Banks <$10 Billion
                                 Source: FDIC

How can financial institutions see revenues grow in the new environment?  We have three proven steps:

             1.      Recognize the key benefit of transaction accounts that generate revenues are liquidity services.  This is why overdraft fees have historically been the largest part of Service Charge revenues.

Multiple Studies Show the Key Need of Transaction Services is Liquidity

           2.      Focus on liquidity and small loan services for future revenues.  Rather than trying to charge deposit fees, look for revenues where the largest opportunity exists historically and in the future.  Banked consumers and small businesses pay three times the revenues of overdraft fees ($77 Billion vs $31B for industry overdraft revenues) for liquidity and small loans that banks currently forego.




            3.      Use digital lending technology to deliver small loan and liquidity to consumer and small business segments to profitably capture the revenues, without cannibalizing any of your existing revenues.   Technology platforms like PaySound for consumers and Cash Flow Checking for businesses drive profitable revenue growth without cannibalizing existing fees.   







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