LAKE FOREST, Ill.—With all the change happening within the overdraft market, what are most financial institutions doing when it comes to this member service that has come under fire from Washington, consumer groups and the media?
Many are lowering price, and in the process making more money through greater volume. More are moving to debit scoring. And, recently, AI has made a big move into overdraft processing, a new report from Moebs $ervices shows.
J.V. Proesel, president of Moebs $ervices, explained how these trends are being used effectvely by credit unions and banks:
- Lower price means more volume. “Since people do make errors or have shortfalls in their payroll-to-payroll funding, having a high price over $20 is not going to help,” Proesel said. “Kudos to Walmart for dropping the price to $15 a transaction and Bank of America to $10. It has been proven over and over again that when a bank or credit union lowers its overdraft price, consuemrs use the affordable service more, revenue increases and people stay away from payday lenders.”
- Debit scoring decisioning. “Establishing overdraft limits analytically has substantially expanded OD use while reducing loss resulting from the expanded use. An overdraft is an unsecured credit, and this is risky business when not properly done,” Proesel said.
- Artificial intelligence. “While AI OD processing was introduced over 40 years ago, it is now the process depositories are starting to use to reduce costs of loss and lower day-to-day operating expenses,” Proesel said.
Which Approach Works Best?
Proesel told CUToday.info it is hard to assess which of the trends is most important.
“Ultimately it is a combination of price vs. risk vs. cost,” he said. “Each depository is going to have a different view of each of these pieces to the overdraft process. Clint Eastwood in his movie he directed and produced—"The Good, The Bad and the Ugly”—has the answer. AI is the most relevant and lasting. However this trend can get ugly if the financial institution does not understand AI. AI is driven by Big Data. This means the more information used making the OD decision, the better the decision and the lower the cost for the FI and the consumer. Using the old process of judgmental decisioning is a bad OD trend. Why? Insufficient information to make the decision, coupled with emotion potentially skewing the decision, will produce disastrous results.”
J.V. Proesel
Proesel said that coupling judgmental OD decisioning with a zero OD price is the “worst way to go.”
“The bottom line for provider and user will be substantially reduced,” he said. “OD losses and cost skyrocket with human interface—this is an analytical process,” he said. “And there is no value in a service which is offered for nothing.”
Turning to pricing trends, Proesel explained that OD prices range from $37 to zero.
“The average for 74.8% of the national market is $19.20,” Proesel said. “The wide range in OD prices is driven by the individual FI’s overdraft philosophy and strategy to attract more consumer transaction accounts.”
As the overdraft market goes through a period of transition, despite the CFPB’s efforts to kill the service, ODs will remain, Proesel said.
“Overdrafts will be around forever because to err is human,” Proesel said. “However, the prudent overdraft user must not allow ODs to happen frequently and without proper cause. Sense and sensibility for both the OD user and provider are essential to unsecured credit, which is what an overdraft is.”