Since we weren't at the May investor conference and haven’t spoken directly with Mr. Demchak, it is impossible to explain what he meant. However, his words sound strikingly similar to those of so many uninformed consumer activists who suggest that consumers are best served when a financial institution returns insufficient funds (NSF) checks in lieu of paying them.

Unfortunately, this contingency doesn’t seem to completely understand the entire payment transaction. They tend to overlook the fact that regardless of whether a financial institution pays or returns a bounced check, there is going to be an NSF fee. If the consumer is going to pay its financial institution roughly $30.00 in excess of the check’s collected balance anyway, why would the consumer also want to pay the payee, who will likely charge an additional returned check fee? In general, consumers appreciate having their financial institution honor their checks even when they do not have sufficient funds, so that they pay only one NSF fee.

So, it’s a ‘got-you product’? On the contrary, it is a service that most consumers appreciate, often thanking their institution for honoring the check. Not only does paying the NSF item eliminate the additional returned check fee for the consumer, it also reduces the embarrassment and headaches returned checks can cause the maker.

So you ask, ‘Why then are overdraft fees falling at banks? Isn’t this evidence that fewer consumers want the service?’ Possibly, but not necessarily so.

Let’s look at several of the causes. First, there are a number of banks that have altered or discontinued their overdraft service, creating a reduction in overdraft income. Secondly, with the popularity of smart phones and internet banking, consumers can easily keep track of their account balances. However, the most significant driver is the continuing shift from checks to other forms of payment by consumers. Today, checks account for only approximately 23% of
transactional items, a drastic reduction from past years and one that continues to gain momentum.

We would propose that overdrafts are NOT a ‘got-you’ product, but a much appreciated and enjoyed service that is often available for short-term liquidity needs. And with the rise in electronic forms of payment, customer-focused financial institutions should consider offering overdraft privileges not only for paper items, but on electronic transactions too. First,
however, they need to identify 1) which customers use payments other than checks; 2) if they are currently eligible for overdraft coverage due to Reg E.; and if not, 3) why they are not eligible (i.e., lack of response or opt-out). When asked, customers will generally tell you they did not respond to opt-in efforts by the financial institution because they never saw the mailing or they
did not understand it.

This is a financial institution’s opportunity to distinguish itself by offering superior customer service. Simply change with the times. If customers prefer utilizing ATM or debit cards, provide them the same overdraft coverage as on their checks. The key is to find a service provider that provides an up-to-date, compliant overdraft solution with a proven debit denial program.

We call that turning a “got you” product into a “help-you” product.