Observations from the Fintech Snark Tank
A White House press release entitled Reading of the third meeting of the White House Competitiveness Council reports that:
“The Consumer Financial Protection Bureau has taken steps to crack down on the nearly $30 billion in “junk fees” — like late-draft fees, bad check fees — that Americans pay each year. Spurred on by CFPB measures, three quarters of the country’s 20 largest banks are getting rid of bad check fees. Overall overdraft fee levels are projected to decrease by $3 billion in 2022 compared to pre-pandemic levels.”
A new study by Cornerstone Advisors, commissioned by Velocity Solutions, is titled Beyond Overdrafts: Helping Consumers Manage Cash suggests that this may be Not good news for Americans – and not in line with what they expect from the banks they do business with.
The hidden fee fallacy
Politicians (and other critics of the banking industry) love to criticize banks for supposedly “hidden fees” they charge their customers.
Americans have a different perspective.
Eight in 10 Americans — including two-thirds of Gen Zers, eight in 10 Millennials and Gen Xers, and nearly nine in 10 Boomers — told Cornerstone that their primary checking account providers adequately disclose their fees.
This finding is ignored by the press and overlooked by the CFPB, which has been working for years to impose additional disclosure requirements on banks, believing that banks must withhold information. The survey data does not support this thinking.
Many Americans find bank fees fair
And for all the press and attention given to checking account fees, three-quarters of Americans believe their primary checking account provider’s fees are fair, ranging from six out of 10 Gen Zers to eight out of 10 Baby Boomers.
Only 27% of consumers believe NSF (insufficient funds) fees – charged when the bank fails to pay for an item for the customer – and overdraft fees paid at the bank does Paying for an item for the customer is not fair.
But that doesn’t mean the rest thinks it’s fair. Four in 10 Americans believe their banks’ NSF and overdraft fees are fair, but a third say they don’t know or aren’t sure.
But if you listen to the White House, you’d think all Americans would rail against these fees. Somehow hidden.
Attacking on junk charges doesn’t solve the real problem
Reducing or even eliminating bank overdrafts and NSF fees won’t solve the real problem Americans are grappling with: liquidity.
In 2021, 70% of Gen Zers and two-thirds of Millennials spent at least once more than they had in their checking accounts, and a quarter of both generations did so three or more times.
The reasons for this are numerous – including unforeseen high spending, unexpected loss of income, overspending and unemployment.
What do Americans do when faced with this liquidity problem? They turn to a variety of tactics, including borrowing from friends and family, arrears if they don’t pay their bills, taking out payday loans, applying for short-term loans, and even selling their belongings to pawn shops.
The real culprit and the wrong answer
It’s not “junk fees” that are doing the most damage to Americans — it’s inflation, interest rates, and a weak economy.
The recent change in many financial institutions’ overdraft policies is good news for consumers and actually good news for financial institutions – that is, from a regulatory and public relations perspective.
From a revenue perspective, it’s a different story as many institutions face millions of dollars in lost fee income. According to Steven Simpson, Senior Director at Cornstone Advisors:
“The waiver of overdraft fees may sound like a big win for consumers. The problem isn’t as clear and dry, however, because the consumer banking model, which offers convenient branches, contact centers, digital banking, debit cards, fraud protection limits, cybersecurity and access to larger amounts of cash, needs revenue to sustain itself.”
However, increasing monthly account fees is not a viable response as it will likely lead to customer losses. Nearly seven in 10 customers said they would close their account and find another bank if their bank increased the monthly account fee by $15.
Americans need better liquidity management
To address this problem — and recoup millions of dollars in lost fees — banks and credit unions must transform their overdraft programs into liquidity management programs. These programs should:
- Be proactive and personalised. A “managed” program assigns overdraft limits based on a variety of account holder data points, including certain deposit and overdraft activity. Institutions should risk profile each account and assign individual overdraft limits based on the account holder’s ability to repay the overdraft.
- be fast Consumers like the speed of instant availability with an overdraft, with many saying they would like the overdraft option if they need money for a $500 purchase (44%, compared with 17%, 22%, and 15% for 4- hourly quick loans). , regular loans 24/7 or 5 days for loan applications).
- Establish a “de minimis exception”. A de minimis exemption is a minimum overdraft amount below which the institution will not charge a fee. Banks can grant this exemption per item or per day. This policy is a consumer-friendly approach to preventing the “$30 charge for a $3 cup of coffee” headline scenario.
- Use tools to limit overdraft fees for low-income consumers. Charging a consumer who has $2,000 in deposits monthly for $400 is not in the best interests of the consumer or the financial institution. Software is available that can reduce the use of the overdraft service (and associated fees) when the fees exceed a certain percentage of the consumer’s deposits.
- Offer a variety of credit alternatives. Banks have scrambled to replace the lost interchange of Buy Now, Pay Later (BNPL) purchases, but the bigger problem could be consumer relationship erosion as other providers offer credit where consumers need it. Banks’ liquidity management programs should offer a range of credit alternatives, including BNPL and referrals to providers who can offer short-term small loans.