Overdraft Fees Going Away?

photo courtesy of: FastCompany

Introduction

What does the video rental and streaming industry have to do with banking and overdraft fees? Well, one of the companies above is still in business and the other is not. In this article, I will share my opinion on why this is relevant to banking.

• Blockbuster’s profit had to be sufficient to keep their worldwide stores and staffing levels. Their profit also relied on something their customers hated – late fees.
• A significant portion of the revenue that Blockbuster needed to stay in business was a revenue stream that Netflix didn’t charge for, since you could keep their movies as long as you wanted.
• Netflix developed a business model that simplified the video-renting process, making it more enjoyable for customers, Blockbuster only thought about maximizing their service fees.

If any of the above sounds familiar to banking it's because it is.  Things like late fees, overdraft fees, service fees, etc are important to a bank's bottom line, but what happens when the industry forces you to change?

Why is this important?

Technologies improve. Industries change. In order to grow, you need to keep a pulse on the ever-evolving needs and preferences of your customers so you can make changes to your model accordingly.

• Consumers hate fees, even though they appreciate the service.

• Neo Banks and Financial Technology companies are continuing to disrupt the banking industry with the use of cutting-edge technology to provide banking services at reduced costs or no costs.

• Traditional banks resting on past laurels only have to look at what happened to Blockbuster.

Service is As Service Does

Banks generate service fees in a myriad of ways that in many aspects can mitigate the impact a lack of overdraft fee income could have on the bottom line. Here are some, to name a few:

1. Account maintenance fees: Many banks charge a monthly or annual fee for maintaining an account, regardless of whether it is a saving or checking account.
2. ATM fees: Banks charge a fee if customers use an ATM outside of their bank’s network.
3. Wire transfer fees: Banks charge fees for domestic and foreign international wire transfers.
4. Returned deposit item fees: If a customer deposits a check that bounces or is returned for any other reason, the bank will charge a fee.
5. Late payment fees: Banks charge late payment fees for credit card and loan payments that are not made on time.
6. Account closure fees: Some banks charge fees if a customer closes their account within a certain time frame.

Now What?

Overdraft fees may not be going away, at least the regulators aren't making them go away in the short term but the recent changes in banking regulations aiming to increase transparency and fairness regarding overdraft fees will make it more difficult to levy those fees without prior customer consent. 

That being said, there has been a growing movement to eliminate or reduce overdraft fees in recent years, with some advocates arguing that they disproportionately affect low-income and marginalized communities. In response, some banks and credit unions have started offering alternative products or policies, such as allowing customers to opt out of overdraft protection, providing alerts for low balances, or providing small-dollar loans as an alternative to overdrafts.

Who will you be?

Overdraft fees are a significant source of revenue for many banks, so it's unlikely that they will completely go away anytime soon. There will need to be a reckoning with bank boards and their management teams as to how best to navigate these turbulent waters.  With Fintech's on one side and NeoBanks on the other, the industry will need to innovate in order to survive this multi-front threat.

Several ways our community institutions can look to improve their services and hence service revenue can be found in the same playbook your competitors are reading: