The Top 10 Components of a Successful Overdraft Program

Overdrafts Are A 'Complex Jigsaw Puzzle'

By Ray Birch

LAKE FOREST, IIl.—Financial Institutions must pay attention to 10 overdraft “components” to offer a successful OD program, says Moebs Services, which believes overdrafts are the most complex financial service to offer.

Moebs Services’ latest overdraft study identified those 10 components, and the company is offering advice on how each can help or hinder the OD offering.

“Overdrafts are a complex jigsaw puzzle. Forming one picture is difficult to be profitable for all. Think of how long it takes to do a jigsaw puzzle,” said Michael Moebs, economist and chair of Mobes $ervices. “ODs are fees and balances put together in one price. Think of how long it takes to get an oil well working. Exploration, drilling to find nothing, then you hit a geyser. Now you get to build a pipeline to get it to a seaport. Then haul it by ship to another seaport. Then refine the oil then transport it to tanks at your favorite gas station. Overdrafts are the same.”

The 10 Drivers

According to Moebs $ervices, the following are the Below are that 10 key drivers affecting the effectiveness of overdraft offerings:

1. Price is Driven by Walmart, Which has 19.1% of the 600 million-plus National Checking Account Market. Walmart Charges $15 per OD Transaction

"Walmart has figured this out. Their price is well thought out and makes the company money,” said Moebs. “Credit unions pricing above Walmart will eventually lose market share to all those that have learned $15 is the effective price.”

2. Limits are the Supply Side of the Economic Price Equation. 

“Limits are the risk of funding the unsecured loan called overdraft. If limits are too high overdrafts lose money because the user cannot repay the funds. Too low and the FI loses a user to competition,” Moebs explained.

3. ODs are Credit and Not a Loan but a Deposit Service

“Overdrafts are regulated by Truth-In-Savings. Processing ODs as a deposit service is checking. The CFPB would like to change this to Truth-In-Lending,” said Moebs. “If done, substantial changes would be made to overdrafts. This could all happen in this election year.”

4. The Basis of OD Pricing is Vital—Balance or Transaction

“Priced as a balance is one workday charge, while transaction pricing produces many more OD charges based on OD individual volume. The choice is one price per balance or Walmart transaction pricing,” Moebs said.

5. There is Value in Waving Fees. No Charge is Valueless.

“Some outfits like Chime or Capital One will forgo OD pricing but go after customers who do not overdraw. This can hurt financial institutions by limiting users with low balances and high volume of charges,” Moebs said. “Charging for interchange becomes vital to have profitable checking accounts.”

Michael Moebs

6. NSFs, SPs, Transfers and RDIs are Part of OD Family

“The business of checking is really a family of overdraft related services. Some FIs will forgo an OD fee but charge high prices for other OD family services,” noted Moebs.

7. With Debit Scoring, Artificial Intelligence Decisioning, the Losses and Costs of ODs Have Been Greatly Reduced Vs. Judgment Decisions.

“More and more FIs are going to AI debit scoring to lower OD pricing which increases OD volume, thus maintains and eventually increases overdraft revenue,” stated Moebs.

8. “Overdraft Collections are Not Loan Collections–Treat Them Separately.”

“Most FIs make a big mistake by not treating overdraft collections entirely different than loan collections. Make OD collections different than loan collections,” Moebs said.

9. Deposit Agreements Need to be Tailored to the Individual FI

“Every FI is different. So, every deposit agreement must be different. Failure to do so will lead to costly lawsuits,” Moebs said.

10. Full Compliance Comes Only by Including All Regulations Both Federal, State and all Regulators

“Overdraft compliance is very tricky. This is because an OD is credit and should not be treated like a loan,” Moebs said.