The Federal Reserve Board last November announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
This development could cost a bank between 30 percent and 60 percent of its checking account fee/service charge income, in the opinion of Mike Sobba, president of Strunk & Associates, a leading supplier of overdraft protection plans.
Specifically, the new rules require that, before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act. They are effective July 1, 2010.
The board said its consumer testing shows that most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions unless they affirmatively consent, or opt in. At the same time, testing shows that most consumers want overdraft services to cover important bills, such as checks they use to pay rent, utilities and telephone bills.
Banks can obtain affirmative consent to opt-in in a variety of ways, including by mail, telephone, electronic means or in person. A financial institution may require a consumer, as a necessary step to opening an account, to choose whether or not to opt into the payment of ATM or one-time debit card transactions pursuant to the institution’s overdraft service.
To ensure that consumers have a meaningful choice, the FRB said, the final rules prohibit financial institutions from discriminating against consumers who do not opt in. The final rules require institutions to provide consumers who do not opt in with the same account terms, conditions and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.
All of this needn’t wipe out checking account fee/service charge income, however. According to Sobba, with proper planning well in advance of the July 1 compliance deadline, the hit to earnings can be softened if not averted altogether. While July 1 seems far off, now is time to formulate an action plan for getting an affirmative opt-in from each checking account customer, Sobba advises.
At least one company, Minnesota-based TCF Financial Corp., isn’t wasting any time. SNL Financial reported recently in its Bank & Thrift Daily that the company said it will “strive to make the rule change … revenue neutral” by reaching out quickly and aggressively to let new and existing customers know about the new opt-in requirement.
Sobba’s firm has specific suggestions for staying on top of the situation:
Calculate your institution’s “at risk” income from this regulation change. That is, calculate your current NSF/OD income generated by card (one-time ATM/POS) transactions from consumer accounts. According to a recent FDIC survey, the OD fee income generated by card transactions is approximately 40 percent. Also, identify who is generating that fee income for your bank.
Contact your core data processor to make sure you will be able to handle the changes to Reg E at the customer level. Although the regulation does not take effect until July 1, 2010, the capability needs to be in effect as soon as possible.
Don’t wait until July 1 to get customers to opt-in to one-time debit card and ATM transactions. An affirmative opt-in decision is needed from each checking account customer before a financial institution can charge a fee for paying an overdraft caused by either a one-time debit card transaction or an ATM withdrawal.
Put together a tracking system for those customers who do opt-in.
The Missouri Bankers Association, in a “Solutions Update,” suggested addressing the challenge with a “multi-pronged” communications strategy. “Acting early and purposefully will help your account holders make informed choices and give you more time to gain critical opt-in consent,” the newsletter advised.
The MBA pointed out that direct marketers have learned that targeting a smaller list but offering more communication touch points yields greater results. “Consider a segmented approach that focuses on the highest-value account holders or heaviest users along with multiple communication touch points, the Update suggested.
Like Sobba, the MBA warned that time is of the essence: “You’ll only have a limited time frame to get consent from your account holders without experiencing a negative impact to your fee income.”
Lost fee income isn’t the only threat to community banks’ bottom lines posed by the revised Reg E. The Independent Community Bankers of America said it “is deeply disappointed by the Federal Reserve Board’s decision to impose yet another costly requirement that will further burden America’s common-sense community banks and lead to less consumer choice.
“The final rule will be operationally challenging and expensive for community banks to implement to cover some but not all electronic transactions,” the ICBA said in a formal statement, “as well as confusing and inconvenient for consumers. Under the new rule community banks will have to reevaluate their overdraft service offerings, which many consumers see as a valuable service.”
The ICBA also urged lawmakers, in light of these strict rules, “to allow community banks to comply with these new regulations and disclosure regulations in lieu of advancing additional and unnecessary legislation.”
Bill Poquette is editor-in-chief of BankNews.
Copyright © March 2010 BankNews Media