What would you do if 20% (or more) of your FI’s fee-based income disappeared tomorrow? While it’s not happening quite that quickly, changes are coming. Find out what you can do to be prepared.
The Overdraft Fees Audit
In 2012, the Consumer Financial Protection Bureau (CFPB) took another look into overdraft protection practices and investigating the overdraft fee itself. They focused on opt-in policies, as well as the types of transactions causing these fees. That exercise led the CFPB to view overdraft as an extension of credit, which, as such, is subject to the whole host of credit rules that govern banks.
So what does that mean for FIs? This year, for the first time ever, the FDIC required banks with more than $1 billion in assets to report the revenue they generated from consumer overdraft charges. More than 600 banks reported a total of $2.5 billion in consumer overdraft fees in Q1 of 2015. That equates to upwards of $10 billion per year. For some banks, that not-so-small chunk of revenue reflects more than 40% of their fee-based income.
Of course, banks have weathered these storms in the past. The challenges of growing revenue have increased substantially in recent years, most obviously in the form of regulations that limit revenue-generating opportunities. Simultaneously — and frustratingly — I’ve spoken with representatives from FIs across the country who point to a myriad of other factors, including historically low interest rates and soft loan demand, which have driven down margins.
We’re still months away from understanding the latest changes: The CFPB has chosen to delay their recommendations until Q4. However, it’s safe to assume that the impact to overdraft fees will be significant. Some prognosticators have estimated that the reduction in fee revenue could be greater than 50%.
How’s that sinking in?
Strategies to Combat the Upcoming Regulatory Changes
Rather than wait, I’m sure most banks are already crafting remediation strategies. Perhaps that means the development of new credit products, new account fees or larger fees on bounced checks. There’s one thing these approaches have in common: They’re not likely to endear FIs with their customers.
Instead of grabbing for yet another quick win on the income-generation front, consider an alternative tactic: look for ways to increase efficiencies within your branch network. This approach has a positive, two-pronged result. It reveals opportunities to improve the customer experience, while driving changes to your people, process and technologies that will reap long-term rewards.
1. Find an Ally in Your Customer
We’ve all seen banks aggressively cut costs at the physical branch level during the last five years, by closing underperforming branches or reducing headcount. Sensible moves when you consider that the average regional bank’s branch network accounts for nearly 60% of its operating expenses.
But to drive greater efficiencies, banks may want to look to an unlikely ally — their own customers. Most of today’s consumers are capable of performing routine banking transactions on their own. In fact, many prefer it. We’ve seen, and often facilitated, the rapid adoption of self-service and mobile banking, with modern In-Lobby Terminals (ILTs) and advanced-function ATMs becoming the norm rather than a novelty.
The good news for FIs is that these self-directed transactions are a fraction of the cost compared to an in-branch teller transaction. So why do many banks drag their feet on implementation? Legacy systems and employee concerns can make dramatic change feel risky and expensive.
However, I believe another, more subtle reason exists: Perhaps many FIs haven’t felt a compelling reason to change — until recently. It’s only been in the past 5-7 years that they’ve been hit with a triple whammy of increased regulations, low interest rates and changing consumer behaviors. With the looming threat of CFPB changes, there’s no denying that FIs are faced with an adapt-or-die situation.
As part of the Global Advisory Services Team, we’ve collaborated with more than 250 diverse FIs to foster smart, strategic branch transformations suited to their unique situations. We’ve helped them become more aggressive at deploying new technology, while also changing how they communicate with consumers and employees to drive adoption.
2. Empower Your Staff
With improved automation in place, FIs can turn their focus to providing higher value services. After all, in today’s highly commoditized banking environment, the only real differentiators among the four banks potential consumers pass in their 10-minute daily commute are the experiences they deliver and the quality of the financial advice they provide.
In my experience, the banks that make the leap and embrace a “universal banker” approach usually end up with the most favorable results. Remember, patience is required — you’re changing the culture of your bank. However, time after time we see institutions that have gone down this path chart dramatic improvements in both product sales and the acquisition of new customers.
3. Explore New Product Offerings
What does the increase in overdrafted accounts tell us? Consumers have a need for affordable short-term credit. Online FinTech startups are busily exploiting this opportunity – but they fall short of traditional FIs in some crucial ways. Most of these companies lack the distribution and balance sheet of a well-capitalized bank. Nor do they have knowledgeable bankers who can explain the product and their value to consumers. Creating new, short-term credit products can not only foster a new revenue stream for banks, but also help them compete with these new rivals.
4. Channel Your Favorite News Source
Banks are publishers of valuable content. Consumers are, after all, more likely visiting your app, branch or ATM for far more compelling reasons than those that drive them to magazines or social sharing sites. Your channels receive millions of impressions per year, from consumers who have provided you with a relationship’s worth of financial data.
Banks must begin to mine their consumer data to uncover more lucrative selling opportunities. Not only that, they should consider third-party marketing collaborations of their own. Imagine presenting your ATM customer with an offer from the nearest coffee shop, based on the knowledge that they frequent coffee shops in the mid-afternoon. While banks are dipping their toes in the water of this new revenue pool, the approach is becoming old news to fintech companies such as Google Wallet, mint.com and others.
How Will You Proceed?
As the date draws near for the CFPB’s recommendations on overdraft practices, how prepared is your financial institution? Rather than running for the hills, tearing your hair or speed-dialing your psychiatrist, will you be able to rest easy, knowing the long-term strategies your FI has implemented will carry you safely through the tumultuous sea of tightening regulations?
Taking a hard look at your people, processes and technologies (perhaps with the right partner at your side) may reveal some unexpected opportunities to foster improved consumer relationships rather than more grumbling over fees. Restrictions and regulations show no signs of slowing, so it will be vital for FIs to embrace change, improve efficiencies and enhance the consumer experience with a thoughtful, long-term approach.
Would you like to talk about what stage of the process your FI is currently in as you prepare for upcoming regulations? We’re here to talk.