Curinos (F)insights

Episode 02: The Decline of Overdraft Fees

August 10, 2022 Rutger van Faassen Season 1 Episode 2
Curinos (F)insights
Episode 02: The Decline of Overdraft Fees
Show Notes Transcript

Curinos' Olivia Lui talks to Rutger about overdraft and research into its uses.

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Rutger van Faassen: Hello, and welcome to Curinos (F)insights, the podcast that explores some of the most pressing topics for financial services. Insights that help you navigate today and anticipate tomorrow. Welcome to the Curinos (F)insights podcast. Today, my guest is Olivia Lui who's director of marketing and product in our omnichannel sales and experience practice here at Curinos. Welcome, Olivia, to the podcast.

Olivia Lui: Thanks, Rutger.

Rutger: Yes. Before we dive into talking about overdraft, can you tell us what your role at Curinos entails?

Olivia: Yes. At Curinos, I run our, so like exactly what you said, marketing strategy and product strategy practice. Basically, work with a lot of different financial institutions, whether they're traditional banks to fintechs of the world, figure out how they actually should compete in the marketplace, leveraging marketing as well as product innovation to actually win over customers.

Rutger: Now, before we dive in, we're going to talk about overdraft today. In very simple terms, just explain what overdraft means or overdrawing your account means.

Olivia: Overdraft generally means that due to a transaction, there has been now a deficit in your bank account, meaning when a consumer potentially has $5 in their account, and they go out and make a purchase of $10 and there is a deficit of $5, mean negative $5 in their account. When the bank lets that occur, that means that $10 transaction actually went through, but that means that that particular customer also over-drafted because they didn't necessarily have the whole $10 in their account. This tends to be a pretty, pretty big problem, but also a problem that actually applies a lot of different types of consumers.

Rutger: Great. You're basically going into the red, the money that you don't have, that the bank is basically spotting you.

Olivia: Exactly.

Rutger: Now, it seems that we hear new announcements every day about changes to overdraft policies. What's the current state of play?

Olivia: There has been a lot of momentum in the space, from the largest banks announcing getting rid of their overdraft and insufficient fund fees to actually announcing pretty large, I would say, overdraft innovations such as standby cash by Huntington to smaller banks, I would say, announcing a little bit more transparent types of policies.

Rutger: You mentioned another thing there, insufficient fund fees. If you do overdraw your account, and in your example, you go to $5 into the red, many banks will charge a fee for that. Is that what that insufficient fund fee is?

Olivia: Yes, exactly. It'll charge a fee for that. Honestly, if they try to actually transfer money as well into that account, try to cover you and spot you, and if there isn't necessarily enough funds, then that's also when they charge you.

Rutger: What are clients telling you is the main impetus for the changes? Regulators haven't issued, any new restrictions have they?

Olivia: No. Actually, regulators have not made any major changes, but there has been a lot of pressure from the new administration, and in particular, from the CFPB to actually further regulate overdraft. CFPB meaning the Consumer Financial Protection Bureau, really there to function as the regulatory group that actually protects consumers' interest when it comes to financial services.

Senators Warren and Booker actually introduced an amendment to some of the regulations last year to actually drive further scrutiny around how much banks can actually make or how much banks can actually make from a revenue perspective from overdraft. It didn't pass, but the fact that the amendment actually was up for discussion and debate made it so that there's more regulatory pressure.

Rutger: That's very clear. The banks are actually getting ahead of the regulator, but the regulator is clearly giving them some hints that if they wouldn't that there would be regulation coming. Now, overdraft has been the big source of revenue for banks. Does that all go away for banks?

Olivia: Generally speaking, overdraft accounts for about 70% of non-interest revenue for a typical bank. Given the level of not only regulatory pressure, but also competitive pressure, now that a lot of different banks and fintechs have historically really made a movement in this space, we're expecting probably a decline of about 60% in this stream of revenue. That is a pretty massive decline in revenue that would need to be really reevaluated by institutions in the space.

Rutger: Yes, I would say so. That does seem like a large number. That isn't like 1% or 2%

Olivia: No. [chuckles]

Rutger: That is like 70% of non-interest revenue. That is a big, that is a big amount of money. Now, how do you think banks can make up for a lost overdraft revenue?

Olivia: The first thing that really comes to mind when it comes to making up for that revenue stream is actually focusing on increasing customer value. Making sure that your experiences, your products are actually designed in a way that's very fit or a good fit for the customer base that you're serving is going to be critical, especially in making sure that you're driving deeper value, and you're keeping and retaining that customer for a much longer time. That will help actually drive, of course, really make up for some of the loss revenue from overdraft, but also I would argue make it a much better experience for your customers overall.

The second big opportunity though, I really think this is a interesting time and really special time in the industry is that this actually creates an opportunity for banks or other institutions to really think about what's next when it comes to actual potential different streams of revenue. We've always, as an industry, have thought about fees in more of a penalizing way.

One of the things that I think banks can really think through is whether or not we can actually flip the script on fees and actually create potentially a more value-driven type of fee revenue, so it's more service-oriented. "What is it that I can do that provides much more value to my customer that they're actually willing to pay for?" That's something that I would argue it should certainly be top of mind for product leaders in this space to actually really think through what's next.

Rutger: Curinos recently issued a report on overdraft with the Consumer Bankers Association.

Olivia: Yes.

Rutger: What did that reveal about customer behavior?

Olivia: The fascinating things about that report, there are two big takeaways. The first is that overdraft is really actually a service that is utilized by consumers across all demographics. I think one myth that is out there in the marketplace is that overdraft tend to be for consumers of either lower income or are less privilege overall. What we have found actually from the study is that consumers of all income, as well as all asset levels actually utilize overdraft, but just in different ways, which I would say leads to the second big takeaway out of the study is that over drafting actually tends me more of an intentional action than not.

What we have found is that the majority of people who have over-drafted in the past year have actually cited that it was a conscious decision that they were making, that they were over drafting into their account.

Rutger: Were there any reasons mentioned in the report to make, to overdraw their accounts, to actually make some sort of a payment?

Olivia: Yes, so I'll bring up maybe a couple of segments that we found. Based on the overdraft results and attitudes, we were actually able to segment and figure out what types of use cases, what types of consumer is actually utilizing overdraft. One segment is what we like to call the lifestyle segment. This group, one of the biggest drivers and attitudes behind their financial decisions is they must and need to always look successful. That's an attitude that really is a big motivator for this particular segment. This segment tends to be actually higher income and tends to have more assets overall than the typical or average American.

Now, we have another segment that are really the day-to-day needs, where there are certainly folks out there, there's a segment that utilizes overdraft to actually help cover certain unexpected expenses, but certainly, something that's really critical to their day-to-day life, whether it is paying a bill and helping them cover that. As you can tell, lots of different use cases, but certainly intentional. Overdraft then really isn't necessarily, I got you, what you talked about, but it's more so a service that a lot of consumers intentionally use.

Rutger: Interesting that both from a, "Hey, I don't want to look silly at the checkout as the card bounces," but also like, "Hey, my washing machine broke down, and I'm not getting paid until two weeks from now, but I do need to replace my washing machine."

Olivia: Yes.

Rutger: Or maybe even pay my rent. Those might be things that people actually choose to do, and maybe there's even worse consequences than paying a fee if they don't make that payment.

Olivia: Exactly.

Rutger: That makes sense. Now, if overdraft goes away, doesn't that leave some consumers in the lurch?

Olivia: It really does. This is a big concern. If overdraft truly goes away, it will leave consumers, certainly, some of the consumers in the use cases that we just talked about, especially those that are unforeseen or unexpected things have happened, that would certainly push consumers to potentially other forms of credit. I would say one of the big things to think about then for a lot of institutions who are playing in the space is if you are to actually rethink overdraft, are there other ways then to address some of those needs?

Rutger: Which then raises the question, what kinds of products can be created to replace overdraft? Are there different strategies for big banks versus small institutions? What are your thoughts there?

Olivia: Generally speaking, based on the use cases that we even just talked about, credit products is really a natural place to extend to, and just rethink what that looks like. Many of these cases require either, I would say some form of small-dollar lending, so not a large amount of credit or access to credit that the consumer would need, but there may be cases where, like you said, maybe the washer and dryer, or maybe both are broken, and in that case, it's a much larger expense or maybe the car has broken down and we need to actually fix the car so the consumer or customer can actually go to work.

Those are larger expenses that may require other credit vehicles to actually help figure out how to actually address that for the consumer if you were to actually replace overdraft. Now, I would say though, for smaller institutions in the industry, I don't necessarily foresee overdrafts getting replaced necessarily for smaller institutions overall. We're likely going to see more near-term actions like implementing more transparent overdraft policies, more consumer-friendly changes, like a lower overdraft fee, a higher de minimis, so maybe there's more of a grace for how much you can overdraft, or maybe even some sort of grace period, like, "Let's give you 24 hours to actually make up what you had created from a deficit perspective."

Rutger: To be clear, this is de minimis, it's a great Scrabble word, but what does that stand for?

Olivia: De minimis is the amount that you are able to overdraft and so create a depth and go negative and into your account without being charged a fee. It's more of grace, if you will, that the bank is providing.

Rutger: Now, we also hear a lot about buy now, pay later, does that fit into the overdraft equation?

Olivia: I think there's a big possibility for buy now, pay later, BNPL, to actually try to fit some of these use cases, especially what we talked about a little bit earlier with the lifestyle segment where it's more commercial purchases, that's the perfect place where BNPL really plays. I do think it could be a really interesting opportunity for BNPL providers to think about what are other use cases to actually extend that credit chassis into such as potentially paying bills, or maybe it is a larger purchase and/or a larger expense that would need to be covered. Certainly, something that would be fascinating to see as BNPL picks up.

Rutger: Maybe these somewhat unexpected payments that you need to make, like you go to the dentist and you thought everything was okay, but now they say, you need quite a bit of treatment, and it's going to be $500. Maybe that's where the buy now, pay later, this point-of-sale financing actually could come in and replace where maybe otherwise you would've overdrawn your account.

Olivia: Exactly. It may give you a really great alternative without really impacting your status with the bank, would give you a really good and clear also installment payment method as well, so that it really breaks down that credit vehicle for you.

Rutger: Have you seen any other innovations for short-term liquidity or fintechs leading to charge here?

Olivia: Yes, so we are seeing quite a bit of innovation, short-term liquidity in the space. Last small-dollar lending, BNPL of course, is a big part of that movement as well. Fintechs are moving fast in the space, but we are seeing traditional players, like Huntington as well as PNC really start launching and rethinking what this looks like. I know we talked about standby cash earlier, that is certainly a way for small-dollar lending, and it actually provides a pretty clear installment payment schedule as well to their customers.

I would say the other part of short-term liquidity though that a lot of institutions have not necessarily thought through or have not necessarily innovated in within the space is actually around expanding that credit box.

Rutger: I think also what we're seeing is with Chime and some others are offering this as well where you can get earlier access to your paycheck, which could do the same thing. If I have a payment and I'm short because I'm not going to get paid until, I don't know, a couple of days, that might lead to overdraft. If they give me access to that, that might solve the problem. Is that another way how fintech can play into this space?

Olivia: Yes. Fintechs really led the charge on that with Chime. I will say that that is certainly something that we're seeing more folks start to pick up on too, from a traditional bank's perspective. Certainly, fintech's leading, but not necessarily finishing out. [laughs] A lot of followers and fast followers. That is certainly, especially two-day payday advance, certainly something that will likely become more table stakes or increasingly more table stakes as more players start offering that service.

Rutger: We talked about buy now, pay later, but that is mostly also driven by fintechs that are doing that, the Klarnas and the Afterpays of the world. PayPal, obviously, is very big in that, all with a fintech background. I think what's interesting there, what I observe is that they will step you into larger amounts. Maybe that's a way to assess credit worthiness, to say, "Hey, first, I'll spot, I'll give you a loan, a buy now pay later loan for something under $50, and then if you pay me that back, then maybe next time, I'll let you have a loan for $100 and then maybe after that, I'll let you have a loan for a Peloton bike which might be thousands of dollars."

Olivia: Thousands. [chuckles]

Rutger: That might be a way to easily step into with customers that might not have the best credit, or don't have a credit history to actually build one rapidly by giving them a buy now pay later loan and see how they pay back.

Olivia: Yes. That's definitely a way to test and learn as you go. I do think there are probably other variables out there that should be considered. I know this comes up a lot is evaluating how often you pay your rent on time. What is your timeliness of paying certain bills on time, et cetera? Those are certain things to continue to evaluate, and certainly a big opportunity for the industry.

Rutger: Finally, we're asking each guest what is a term or an acronym or lingo that you would like to retire or redefine?

Olivia: I love this question because I would love to redefine segmentation. [chuckles] The word segmentation in this space, the number of times that I've talked to people within the industry who have defined their target segment as Gen Z or Millennials. Now, I just want to redefine it because the reason why Gen Z and Millennials are not true target segments nor segments is because they are not monolithic.

They're certainly too big of a group [laughs] to actually target. I would like to redefine the word segmentation into the definition of a consumer segment that incorporates attitudes, behaviors as well and engagement models. All three of those items really then tell the story of what motivates that certain segment, which then should really inform us when it comes to marketing positioning, product innovation, and experience innovation. That segmentation is why I'd like to redefine. [chuckles]

Rutger: Great. Yes, no, that makes a lot of sense to redefine that and not just say, "Hey, based on someone's age that that is a segment." I think that is very helpful. You also brought an Finsight Fact for us which I thought was very interesting and very insightful. Curinos research has found that financial institutions that haven't adopted overdraft innovation have experienced a nearly 30% reduction in consumer acquisition. That is quite impactful. Do you want to elaborate a little bit on that finding?

Olivia: Yes, so that finding was specifically from our U.S. Shopper research and actually making a comparison between 2017 to 2020, just to even get a sense of for those who actually went to the marketplace with some sort of overdraft innovation, what was the difference in their acquisition power? In terms of what share of the churning population, so what share of consumers were they actually able to acquire? What's interesting is that for those who did not actually go to market with overdraft innovations, we saw a 30% decline between 2017 and 2020 in how effective they were in acquiring new to bank customers. That's powerful. [chuckles]

Rutger: That is very powerful, yes. Absolutely. No, that's certainly something to take away here. If for nothing else take that away and think about that and see what you can do, as an organization. Now, thank you again, Olivia, for joining us today. I'm Rutger van Faassen, and this has been the Curinos (F)insights podcast helping you navigate today and anticipate tomorrow. [music]

As always, thank you to our Curinos Finsights team. Robin Sidel is our Director of Thought Leadership. Editing and production by our Senior Designer Adrienne Cohen. Project management by our Marketing Communications Manager Meagan Brezette. Music is by vizion-studios. I’m your host, Rutger van Faassen. You can find more insights at curinos.com. Please subscribe and review wherever you listen to podcasts.

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