Your Core Can’t Manage Your Overdraft Program

Has your ‘core rep’ or a core salesperson told you they can ‘save you money’ by handling your overdraft program instead of an overdraft solution provider?  If they do, the first question you should ask them is ‘how much will you increase my overdraft fee income?’.  Operations and technology folks think in terms of operational process and efficiency, not maximizing program profitability.  Because overdraft protection has been targeted for so long by regulators as an industry, we have stopped thinking in terms of maximizing performance and too often are falling into the trap of thinking about our overdraft program in the context of reducing expense and finding operation efficiency.  So, some technology providers are latching on to that and are saying ‘we can help!’.  Just one problem…they can’t.

Operational efficiency and automation are great.  Don’t get me wrong, I’m all for improving efficiency when those improvements can actually move the needle in terms of my bottom line.  But focusing on the operational efficiency of our overdraft program unfortunately is the wrong aspect of the program to be focused on.  Why? Because the cost associated with administering the program is a rounding error compared to the revenue.  Certainly, if there is an easy way to gain some efficiency and reduce expense we should do it.  But what we want to absolutely avoid is going down a path where we put all our eggs in the cost reduction basket and lose sight of the most important element of the program – revenue.

To illustrate my point, a simple overdraft program P&L is included below.

As you can see, an overdraft program is massively profitable when viewed in terms of return of capital – arguably the best way to compare relative profitability from one service to the next.  Note, these revenue figures are based on industry average statistics to be conservative – not on results that Strunk clients are able to produce.

Often, we end up making decisions in vacuums – looking for ways to reduce expenses or increase fee income or reduce 3^rd party software expense – without looking at the whole picture.  Total estimated operating expense for this typical program is only $84K – providing a net margin of over 85%!  Nothing produces that kind of profit.  The challenge we face is tinkering with the expense side of this equation most often results in an adverse impact on the revenue side of the equation – the piece we need to be most concerned about.  Sure, anyone can produce collection letters and notices.  Few can actually provide solid advice on how to maximize profitability of the most profitable program at the bank and how to ensure compliance in the process – the core provider definitely can’t.  Your overdraft program isn’t the place to look to save a few thousand dollars.  You likely will be risking hundreds of thousands instead!