Publications & Resources

March/April 2010
New Look for the Community Bank

 

Navigating the Changing Tides Impacting Fee Income

By Anthony Jabbour 

Bankers should have one huge red circle marking July 1 on their calendar. And if they haven’t begun to consider actions to offset the financial tremors that day will trigger, they better be ready for a hefty hit to their bottom line. How big a hit? Estimates range from 20 percent to 75 percent of banks’ total revenue from nonsufficient funds and overdrafts.[1]

The jolt on July 1 concerns new Federal Reserve Board rules[2] that go into effect on that date. The rules prohibit financial institutions from charging consumers fees for paying overdrafts of automated teller machine and one-time debit card transactions unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

The regulations, adopted last November, aren’t likely to be the last assault against NSF/OD fees. Heeding constituent complaints about escalating bank fees, Congress has had its eye on even tighter restrictions on the amount and frequency that banks can charge such fees.

Certainly, as early estimates suggest, banks and credit unions won’t lose all of the tens of billions in revenue they earned in 2009 from NSF/OD fees. But even losing a large chunk of that amount will cripple many banks’ bottom lines unless they take steps to offset the loss of NSF/OD fees. 

So what can banks do to offset the loss of NSF/OD income? Actually, banks can consider several actions, and here are a few:

  • Encourage customers to control the order of their payments. This innovative personal financial management approach positions a bank as a helpful financial partner. The bank alerts customers to potential overdraft situations and allows them to proactively convey how they want to act on that information. It’s called “payment income in chronological order,” or PICO. The bank can charge small fees for these flexible services and maintain the trust of its customers, who value this accommodation. Further, banks don’t have to gut their back-office operations when employing this core agnostic add-on software.  (The Fed is neither requiring nor suggesting such add-ons, which don’t currently exist.) 

  • Introduce a direct-deposit advance product. Such a product allows a customer with a direct-deposit feature and in good standing to access an emergency advance of $300-500. This amount is repaid automatically from a subsequent direct deposit, and fees are assessed on the face amount of the advance.

  • Provide overdraft-fee protection. Such protection or insurance might involve a monthly charge in exchange for the waiver of “x” number of NSF/OD items per month or year.

  • Innovate product design. Banks could consider offering “not so free” checking since NSF/OD fees have made free checking possible. They could redefine “free” checking through usage and/or servicing conditions that reflect the value of payments income and servicing cost. Banks also could expand the menu of other value-added services and discounts/fee waivers in prepackaged accounts. Customers might get these extras in exchange for a minimum balance, direct deposit relationship, total relationship balances, or a fixed monthly fee. Additionally, banks could review debit card and prepaid debit card products and services.

  • Continue to look for opportunities to maximize NSF/OD income. Overdraft fee income still tends to be a significant income component for a well-defined segment of a bank’s customer base, and these customers will continue to overdraw their accounts. A bank should pursue this segment of its customer base aggressively and communicate a lot with them about the upcoming charge in an effort to have them “opt-in.”

  • Monitor evolving pricing trends. If regulation significantly drives down income levels, watch the largest banks for new and possibly higher pricing levels for NSF/OD activity. Also consider non-traditional pricing structures that may represent a more benign approach.

Above all, whatever banks do to compensate for slipping NSF/OD income, they should increase customer communications. They should explain proper financial management to customers, including how NSF/OD processes and procedures fit within the range of services they offer. And they should be transparent in explaining what they’re doing. It just might keep bankers from having to circle other days on their calendar in bold red to note yet more federal actions. 

[1] FIS estimates of its client base.

[2] Federal Reserve Board news release, issued Nov. 12, 2009, regarding Regulation E final rules.

Anthony Jabbour is an executive vice president at FIS and responsible for its Financial Solutions Group. FIS is the new corporate identity sparked by the Oct. 1, 2009, merger of Fidelity National Information Services, Inc., and Metavante Corporation. He can be reached at 407-551-8396 or Anthony.Jabbour@FISglobal.com.

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