Fintech Snark Tank Observations
A White House press release titled Reading of the Third Meeting of the White House Competition Council reported that:
“The Consumer Financial Protection Bureau has taken steps to address the nearly $30 billion in ‘junk fees,’ like late fees, overdraft fees, bad check fees, that Americans pay each year. Spurred by the CFPB’s actions, three-quarters of the nation’s 20 largest banks are getting rid of bad check fees. The overall level of overdraft fees is on track to drop by $3 billion in 2022, compared to pre-pandemic levels.”
A new study from Cornerstone Advisors, commissioned by Velocity Solutions, titled Beyond Overdraft: Helping Consumers Manage Liquidity suggests that this could No be good news for Americans, and not in line with what they expect from the banks they do business with.
The fallacy of the hidden fee
Politicians (and other critics of the banking industry) love to criticize banks for the so-called “hidden fees” they charge their customers.
Americans have a different perspective.
Eight in 10 Americans, including two-thirds of Gen Z, eight in 10 Millennials and Gen Xers, and nearly nine in 10 Boomers, told Cornerstone that their top checking account providers properly disclose their fees.
This finding is ignored by the press and overlooked by the CFPB, which has worked for years to impose additional disclosure requirements on banks, assuming that banks should be withholding information. The survey data doesn’t support that thinking.
Many Americans think banking fees are fair
And despite all the press and attention paid to checking account fees, three-quarters of Americans believe their primary checking account provider’s fees are fair, ranging from six in 10 Gen Zers up to eight in 10 Baby Boomers.
Only 27% of consumers believe that NSF fees, which are charged when the bank doesn’t pay for an item for the customer, and overdraft fees, which are charged when the bank does it paying for an item by the customer, they are not fair.
That does not mean, however, that the rest think they are fair. Four in 10 Americans believe the NSF and overdraft fees charged by their banks are fair, but a third say they don’t know or aren’t sure.
Yet listening to the White House, one would think that all Americans are protesting these tariffs. Which are somehow hidden.
Attacking ‘junk fares’ doesn’t solve the real problem
Reducing, or even eliminating, overdraft and non-sufficient funds fees won’t solve the real problem Americans struggle with: liquidity.
In 2021, 70% of Gen Zers and two-thirds of Millennials spent more money than they had in their checking accounts at least once, and a quarter of both generations spent three or more times.
The reasons for this are numerous, including large unexpected expenses, unexpected income shortfalls, overspending, and unemployment.
What do Americans do when faced with this liquidity problem? They resort to a wide variety of tactics including borrowing from friends and family, incurring late fees for not paying their bills, taking out payday loans, taking out short-term loans, and even selling their possessions to pawn shops.
The real culprit and the wrong answer
It’s not “junk rates” that do Americans the most harm: It’s inflation, interest rates, and a weak economy.
The recent change in overdraft policies at many financial institutions is good news for consumers, and indeed good news for financial institutions, from a public relations and regulatory perspective.
From a revenue perspective, it’s a different story, with many institutions facing millions of dollars in lost fee revenue. According to Steven Simpson, Senior Director at Cornerstone Advisors:
“Waiving overdraft fees may sound like a huge win for consumers. However, the problem is not that simple, because the consumer banking model that offers convenient branches, contact center, digital banking, debit cards, fraud protection limits, cyber security and access to larger amounts of cash needs income. to hold on.”
However, increasing monthly account fees is not a feasible reaction, as it is likely to result in lost customers. 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 lost in fees, banks and credit unions must transform their overdraft programs into liquidity management programs. These programs should:
- Be proactive and personalized. A “managed” program assigns overdraft limits based on a variety of account holder data points, including specific deposit and overdraft activity. Institutions must establish a risk profile for each account and assign individualized overdraft limits based on the account holder’s ability to pay the overdraft.
- Be quick. Consumers like the speed of immediate availability using overdraft, and many said they would want the overdraft option if they needed funds to make a $500 purchase (44%, compared to 17%, 22%, and 15% for loans 4-hour quick access loans, 24-hour regular loans, or 5 days for line of credit applications, respectively).
- Establish a “de minimis exception”. A de minimis exception is a minimum overdraft amount below which the institution will not charge a fee. Banks may provide this exception per item or per day. This policy is a consumer friendly practice to avoid the main “$30 fee for a $3 cup of coffee” scenario.
- Use tools to limit overdraft fees for low-income consumers. Charging $400 to a consumer who has $2,000 a month in deposits is not in the best interest of the consumer or the financial institution. Software is available that can reduce overdraft service usage (and associated fees) when fees exceed a certain percentage of a consumer’s deposits.
- Provide a variety of credit alternatives. Banks have struggled to replace the lost exchange of Buy Now Pay Later (BNPL) purchases, but the biggest problem may be the erosion of the relationship with the consumer as other providers offer credit at the point of need. consumer. Banks’ liquidity management programs should offer a range of credit alternatives, including BNPL and referrals to providers that can offer small-dollar short-term loans.