Brendan gave a great outline of the new overdraft fee regulations coming into effect in the US in 2010. Given, these are the new Fed rules and we haven’t yet heard what the damage will be from legislation pending in Congress, but at least we have something to work toward now. But what does that mean? In my estimation, banks have four options for how to address the new legislation:
1) Do nothing and work on a smaller scale given the decreased revenue.
2) Implement monthly service fees across the board on all checking and savings accounts.
3) Implement risk-based pricing – customers get charged service fees based on overdraft history.
4) Get creative and develop new products that attract customers willing to pay a fee for the additional benefits.
As with anything affecting thousands of organizations, we’ll see a mix of solutions and it’s going to take awhile to see which are successful and which aren’t. The first two options are my least favorite, for obvious reasons (I hope). Risk-based pricing and new products, while the most difficult to enact, are the ones that will best set up a financial institution for future growth. So that begs the next question – what do we need to do to best enable risk-based pricing and new products?
Each year at TowerGroup, we compile what we think will be the Top 10 business drivers, the strategic responses to those drivers and the technology initiatives that will be necessary to address those drivers. It should come as no surprise that the changing regulatory environment is one of the top drivers. The technology initiatives to address this business driver will include predictive analytics software and single customer view capabilities that can give the full picture of a customer’s relationship with the bank – thereby allowing banks to compare customers and implement pricing and products that fit their cost or benefit to the bank.
New products and rewards programs will most likely factor largely in FI responses to the gaping revenue hole. As one of my superior colleagues, Bob Hunt, has pointed out, free checking is easy. You don’t have to think too hard to offer free checking. But to think of new products that make a consumer willing to pay a service fee takes ingenuity. Debit affinity programs, family savings accounts, “all-inclusive” checking accounts – these are all products that can strike a nerve with a certain consumer.
So if you’re at a FI, what are you doing to address the new overdraft fee regulations? If you are a vendor, what are you doing to help your FI customers manage through this massive new challenge? Let me know. I’d love to hear about it.
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UK – overdraft ruling saves banks £2b 11/26 Daily Telegraph Britain’s banks will be more than £2b richer as a result of the Supreme Court’s surprise ruling that their overdraft charges are not unfair. Lenders were facing a raft of claims if the original ruling had been upheld. More than 1.1m bank customers had hoped to recover an estimated £1.7b before all payouts were frozen 2 years ago when the court case was launched. Some £560m had been returned to customers & further claims were expected. ‘Overhanging the shares was the fact that there would have been quite a number of retrospective payments going back to 2001, perhaps even longer,’ said Richard Hunter, head of UK equities at Hargreaves Lansdown. ‘It’s something the banks could do without given the current economic situation.’ He added that the repayments could have run to ‘billions of pounds’. The ruling means few customer claims are now expected to be successful. However, Lloyds Banking Group confirmed it will review claims from customers in financial hardship but reject others. The British Bankers’ Association said members will work to ensure customer complaints are resolved quickly. ‘We recognise this issue has been of real concern & we are pleased that this decision now brings clarity for all parties,’ it said. There had been fears that a decision against the banks would have led to the end of Britain’s 24-year-old system of free banking for those in credit. Hugh Evans, law firm DLA Piper, said: ‘The ruling is obviously good news for the banks. It is positive for consumers who manage their accounts properly – the banks are now unlikely to scrap free banking.’ 12m people regularly incur unauthorised overdrafts, which subsidise ‘free banking’ for those who do not exceed their overdraft limits. The Office of Fair Trading, which brought the test case, has claimed penalty fees on unauthorised overdrafts generate £3.5b for banks each year. It argued that charges of up to £39 do not reflect the banks’ administrative costs, estimated by some at just £2.50. In anticipation of an unfavourable ruling, banks have been overhauling business models. Unauthorised overdraft charges have been reduced by all lenders & almost ½ of all current accounts now charge a monthly fee, compared with 1/3 in 2006. Britain’s current account system is unusual in that cash management fees are extremely low as the cost of running the majority of Britain’s 54m accounts is subsidised by penalty fees. According to a report by CapGemini, ½ the cost in the UK comes from ‘exceptions handling’ compared with around 5pc in North America & the eurozone. Evans added: ‘This is a brave decision by the Supreme Court & a reminder that there are boundaries to consumer rights. The case is a massive blow for claims management companies.’
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