Remember the old story about a farmer that discovered his goose was laying golden eggs? He got greedy and decided to kill the goose to get all the eggs at once, only to discover there was nothing inside. Well, this is a good analogy for overdraft privilege – your ODP program is the goose and ODP income is the golden egg. The farmer in my analogy would be continuous overdraft fees. What is a continuous overdraft fee? Some financial institutions charge additional fees if an account is overdrawn longer than a certain period of time. If that period of time is three days, for instance, and the account has not been brought back positive, then a daily charge (typically $5-$7) is added until the account is no longer overdrawn. A continuous overdraft fee may put a stranglehold on your golden goose and potentially subject your institution to regulatory criticism.
Examiners closely monitor overdraft programs. A financial institution’s disclosures and practices relating to continuous overdraft fees may give rise to UDAAP violations if actual practices do not precisely follow disclosure. Financial institutions are encouraged to review the information provided to consumers concerning overdraft services, particularly any continuous overdraft fees, and conduct transactional testing to ensure that the financial institution is charging these fees as disclosed. If a financial institution assesses a fee based on calendar days but a customer can only cure the overdraft on business days, this could be problematic. For example, if a financial institution charges a continuous overdraft fee after three days, and an overdraft occurs on Thursday, the third calendar day after their overdraft is Sunday. Because the FI is probably closed on Sunday, if a fee is imposed for that day the FI will likely be found in violation.
A continuous overdraft fee has other areas of concern regarding compliance issues. FDIC guidance around excessive use states that if a customer overdraws his or her account on more than six occasions where a fee is charged in a rolling twelve-month period, the financial institution must take meaningful and effective follow-up action. An “occasion” occurs each time an overdraft transaction generates a fee. This means that the FDIC considers each continuous fee to count toward the six occasions before the financial institution needs to reach out to their customer to council them about their account. So one overdraft fee plus five days of continuous fees and the customer is at six occasions in one week. There are concerns with this because most core systems are unable to track the continuous fees as an occasion and it leaves the financial institution vulnerable for not tracking the customer overdraft occasions properly and not effectively sending out information to customer on alternative overdraft programs. Also charging fees significantly greater than the amount of the item being cleared could increase the financial institution’s reputational risk.
Another area of FDIC concern around overdraft privilege programs is daily overdraft limits. Most financial institutions will implement a daily limit on their overdraft program by the number of transactions that will be subject to a fee. Stating your overdraft limit this way you could result in lost fee income because a continuous overdraft fee, typically less than an overdraft fee, will count toward your daily limit. The best way to set your daily limit is by capping your total allowable fee. You can do this by having a specific maximum dollar amount of allowable fees per day. Doing this allows us to maximize our income from overdraft fees and helps prevent the question of whether a continuous overdraft fee should be part of the daily limit or not.
There are better ways to increase fee income aside from raising the price or charging multiple times for the same problem. Start by reviewing your current ODP program to ensure that key performance indicators are being achieved. Also consider new fee-based services tied to your DDA that add value for your customers so that a large portion of the base will be happy to pay and where the fee is far less than the value provided.