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.