The financial services industry needs to be transformed with an added layer of transparency in order to better serve customers. Transparency has the power to safeguard consumers and financial institutions alike. Today, customers are only made aware of a negative balance after the fact, once their transaction has either been returned unpaid (NSF) or paid by overdraft. At this point, they’ve also already incurred a fee.
The service charges that result from these practices have more than doubled over the past three decades. The U.S. Consumer Financial Protection Bureau said that NSF and overdraft fees impose onerous costs on consumers, particularly those who are least able to absorb them. Overdraft fees bring in US$33.4b with a median overdraft charge of $30 for community banks, credit unions and fintechs, according to a Moebs Services Overdraft Study. Only 18% of account holders pay 91% of overdraft and NSF fees, disproportionately bearing the burden. For 25% of these consumers, it represents a week’s worth of wages in overdraft fees annually, according to a Pew Charitable Trust research study.
Fees are only part of the issue
This ongoing debate regarding overdrafts primarily focused on fees instead of the process. The process matters. Once a customer has opted into an overdraft program, they aren’t usually made aware of any shortages in their account, or any fees that might be charged, until after their financial institution decides which items will or won’t be covered. This delayed notification could mean that consumers and small businesses will have to pay multiple NSF and overdraft fees on the same day as well as finding funds to bring their account balance back to positive. If they cannot cover the shortage, then their account might be closed and the unpaid balance sent to a collection agency. This spiral is clearly not in a consumer’s best interest.
A scalable solution is the answer
The solution is straightforward. Offering transparency will give consumers and small businesses the ability to take control of their finances in the most upfront, fair way possible by knowing when they have an overdrawn account and being made aware before any transactions are declined. Any chosen solution needs to be scalable and easy to implement, or it will never reach the populations that need them most or permeate through the thousands of financial institutions and credit unions that serve these groups.
Banks and credit unions can notify customers when a negative balance occurs and transactions are about to be paid by overdraft or returned, and give them time to avoid the ripple effect. Customers should be given the opportunity to log into their online banking and see the detailed transactions that are impacted and decide if they want to reprioritise which items get paid and which don’t. Even though the customer didn’t have enough funds to cover their transactions when they came in, they might be able to now, especially if they were offered alternate payment methods. If the customer doesn’t want any transactions to be declined, but wants to avoid paying any late fees or third-party fees, they could add money to their account via credit cards, Venmo, PayPal, or even a same-day cash deposit. They could also apply any newly available balance from a deposit that is now cleared, for example.
This method shifts control of overdraft management from banks and credit unions back into the consumers hands. It allows customers to avoid most of the disruptive bounced payments for critical transactions. It also helps them to avoid late fees and other third-party fees, as well as negative marks on their credit report.
Opt for customer-centric models
The entire financial industry is currently considering how to address the NSF and overdraft markets, so the time is ideal for customer-centric models that put the customer in control of how an NSF or overdraft situation is managed. In addition to helping customers, it would serve the thousands of banks and credit unions across the country that cannot simply eliminate fees while providing overdraft protection for their customers. Not only does this offer an alternate revenue model, it will drive consumer satisfaction and loyalty, and by notifying customers in advance and letting them decide what to do next, financial institutions have a built-in audit trail that mitigates their risk of litigation.
To complete the industry’s transformation, consider allowing consumers and small businesses the ability to manage their finances in the most upfront, transparent and fair way possible. Look beyond overhauling overdraft fees and focus on putting the customer in control of their financial well-being. This allows them to have the flexibility, power, and insight they need most and makes them a true partner with their financial institution.
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About the Author: Joel Schwartz is the Founder & Co-Chief Executive Officer of DoubleCheck Solutions, a financial technology company with an innovative solution that gives customers and small businesses more transparency and control in the event of Non-Sufficient Funds (NSF) or overdraft transactions, while also offering new revenue opportunities for financial institutions.