Overdraft fees make me want to cover myself in bird seed and stand in front of a toucan cage while duct-taped to the ground. One overdraft fee at your neighborhood Wells Fargo zeroes out your interest for the entire year, and makes you hate your bank even more than you already do. Is that even possible?
Anyway, here’s an interesting article on overdrafts–and then my recommendation for what I would do if I ran a bank.
Beginning several years ago — no one really knows when — banks slowly got into the business of granting short-term, high interest loans to consumers when they attempt to overdraw their accounts. Account holders are automatically enrolled in the programs, which are now standard at nearly all banks.
Why are the programs, which many people have never heard of, so popular? Financial institutions that adopt them can expect a huge spike in overdraft revenue — a spike of 200 to 400 percent, according to the Center for Responsible Lending.
Financial institutions collected some $10 billion in 2005 through what’s sometimes called automatic overdraft protection…
These mini-loans are incredibly expensive. Most debit purchases that force overdraft loans to kick in are for small purchases, the agency says. The median overdraft loan for a point-of-sale transaction is $14.75. The average fee is more than double that amount. And since most consumers pay these loans back within three to five days, the annual percentage rate on a courtesy overdraft loan can be as high as 20,000 percent.
Here’s what I’d do if I ran a bank
First, let me acknowledge that it’s easy to armchair quarterback, as I know from people saying “you should have done it that way!!!!!” at PBwiki.
In any case, I think this recommendation would actually benefit banks more in the long term.
First, if one of my customers overdrafted, I would charge them the regular overdraft fee–but I would notify them that if they enrolled in a personal-finance class, the bank would waive the overdraft fee, and one more (make customers think positively about the future). The classes would be conveniently held at every branch on various weekends and evenings, and would explain basic concepts of personal finance. At the beginning of the class, I’d ask each customer to fill out a detailed survey of their financial needs. During the class, there wouldn’t be a transparent sales pitch, but the presenter could mention the services offered by the bank.
Then, two weeks after the class, I’d contact the class attendees and offer to help them achieve their goals based on the information they filled out on the survey. Maybe they need a money-market account? Or investment assistance? I’d monitor engagement and try to upsell them on something appropriate for their personal situation.
And that’s it–simple on the surface, but understandably very difficult to implement, test, and measure.
Banks: You’ll reduce the immediate, short-term fees you get from overdrafts–the ones that cause your customers to hate you–but you’ll make them happy by educating them and addressing their personal needs. And because you’re offering to waive their fees and educate them for free, you’re going to build an incredibly loyal base of people who will want to stay your customer. Yes, you’ll lose fees up front. But sophisticated customers buy more services from trusted sources, so if you make it up through other services and help your customers achieve their goals, that’s a win-win.
Banks or credit unions who want to know the true depth of my readers’ hatred for overdraft fees can contact me.