By Mike Bender
There have been more fundamental changes affecting retail banking in the last nine months than there have been in the previous 10 years. The changes to Regulation E, the Dodd-Frank financial reform legislation, the new view of fee structures by various regulators, and the general ambiguity of what still may be on the horizon have caused most management teams to freeze with uncertainty.
New Regulatory Changes on the Horizon
With the changes that we now know will occur, financial institutions can no longer sit and hope things will return to the way they were a few years ago. Every bank must take immediate steps to manage the new world of retail banking. On August 11, the FDIC released proposed supervisory guidance regarding overdraft payment programs, which it stated that it expects financial institutions to:
Monitor accounts and take meaningful and effective action to limit use by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling twelve-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage ….
Specific to the FDIC’s proposed Overdraft Payment Supervisory Guidance, the FDIC is focused on making institutions provide detailed documentation of overdraft practices, communication and reporting. The FDIC wants to ensure that financial institutions are offering and monitoring their overdraft programs fairly and are presenting heavy overdraft users with alternatives to overdraft services.
Many banks will not be prepared to provide the analysis and reporting that will be required under the new regulations. Historically, the software that banks have used has been designed to maintain regulatory compliance and account accuracy. Additionally, this software has not been effective in allowing the financial institution to analyze data at the account level to determine true individual account profitability, and the software is not capable of providing account-level data analysis to determine if policies and fees are fair to the consumer.
Financial institutions have invested millions of dollars in CRM tools and various bolt-on software packages to do things like manage overdraft limits from a global level. Few have added the capability to make adjustments in real time at the account level, and virtually no one has added the capability to further analyze how fees and procedures affect an account from the perspective of what is “fair.”
Complying with Changes to Overdraft Reporting
Based on analysis of the FDIC’s summary guidance, examiners will expect banks to monitor accounts that rely heavily on overdraft services and to provide documentation of detailed customer communication regarding alternative solutions and appropriate daily overdraft limits.
To manage the new requirements of the overdraft reform, banks should focus on three tools to effectively and efficiently manage overdraft services and the reporting requirements in the new regulatory environment:
Monitoring and analysis. The automated solution provides an ongoing analysis of a financial institution’s accounts to identify account holders who rely heavily on overdraft services. It analyzes overdraft limits versus household income and adjusts limits as necessary. The solution identifies account holders who may be better served by utilizing alternative financial products or services.
Communication. The robust messaging feature notifies these account holders of their options and provides documentation that the institution has provided customers with other low-cost options, personal finance counseling and other services.
Extensive Reporting. The extensive reporting component provides institutions with the documentation required to demonstrate the steps taken to proactively manage overdraft services in a fair and responsible manner.
As outlined in the FDIC’s supervisory guidance, overdraft programs will be thoroughly reviewed at each examination. This will require institutions to provide detailed reporting on all accounts with excessive overdrafts and to provide documentation of communication to account holders and the actions taken by the institution to provide alternative products and services. Banks should choose a revenue enhancement strategy vendor that will provide financial institutions with all of the tools and reports necessary to show that their overdraft polices and procedures are handled fairly and are in line with the proposed guidelines.
Mike Bender is CEO of Velocity Solutions (www.myvelocity.com). He has more than 15 years of experience assisting financial institutions with a broad suite of profitability and software related engagements and programs. He can be reached at 910-254-9383 ext. 102 or at firstname.lastname@example.org.