Startup Bets It Can Make 'No Overdraft Fees, Ever' Work for Banks

How much is certainty worth to consumers? If it means paying no overdraft fees, approximately $14.95 a month.

At least, that's what Robert Giltner, the founder and chief executive of R.C. Giltner Services, reckons. PaySound, the software his company began pitching widely to community banks and credit unions last month, allows institutions to easily offer mobile and online checking accounts with no overdraft fees. The pricing of the account is up to the bank or credit union, and the handful using it so far charge their customers anywhere from $9.95 to $19.95 a month. Giltner recommends $14.95, which is what his firm's research finds consumers are willing to pay.

Whatever the right number is, the peace of mind is clearly worth something, Giltner says. Some consumers are "willing to pay for the certainty of no overdraft fees, ever."

R.C. Giltner Services is one of several companies that are testing the market for simplified, transparent checking products. KeyBank introduced its Hassle-Free Account in June, a month after Bank of America released SafeBalance Banking. B of A charges $4.95 per month (similar to prepaid products) while KeyBank has no fees but comes with some restrictions (e.g. if the account is closed within 180 days of opening, the consumer will be charged $25).

These larger banks and PaySound are borrowing a page from the "neobanks" such as Simple (now owned by BBVA), digital bank brands that offer basic, low-cost banking services accessible through a mobile app and/or online. Newer prepaid products like GreenDot's GoBank and Bluebird, offered by American Express and Walmart, also promote such features in addition to other perks.

"They are attaching onto something that is very clear: some people really hate the overdraft fee," says Ben Rogers, research director at the credit union think tank Filene Research Institute. "It makes fees transparent for a person who doesn't like the uncertainty of overdraft."

The product experimentation comes as a recent Pew Charitable Trusts Report found consumers continue to be confused by and disapprove of bank overdraft practices.

After publishing its study, Pew made several recommendations to the Consumer Financial Protection Bureau, including urging the regulator to require financial institutions to improve their overdraft programs and make pricing information clearer.

"Our research shows consumers are troubled by hidden fees," says Susan Weinstock, director of consumer banking research at The Pew Charitable Trusts. "They need to be transparent."

Set monthly fees are "much preferable" to overdraft fees so that consumers can better comparison-shop, Weinstock says.

Federal rules took effect four years ago requiring banks to ask consumers if they want to enroll in overdraft programs — but many consumers say they don't remember opting in, according to the Pew study.

A challenge for a checking account service that promises no overdraft fees and comes with ATM and debit cards, however, starts with the initial pitch to the bank. Financial institutions, long used to making money on overdraft fees, are sometimes befuddled by the idea of promoting something that seems to cannibalize one of their revenue sources.

That monthly account fee is meant to win these banks over, by providing noninterest revenue from the start. Still, "it takes time and education" to sell banks on the concept, Giltner says.

PaySound is a neobank-in-a-box of sorts: a website that provides digital marketing, account acquisition and a set of bank products designed to appeal to Millennials and other budget-oriented individuals, like single parents, who want to pay for things without the risk of $35 penalties for messy mental math. (Giltner's bank partners provide all the funding and back-office work.)

R.C. Giltner, based in Louisville, Ky., aims to help smaller financial institutions – those that lack the resources to buy a neobank like Simple or create the same capability on their own, as Customers Bancorp is doing -- reclaim transactions they have been losing to younger banking services provided by prepaid card providers and others.

"There is a huge opportunity for financial institutions... to repackage things they are doing right now with checking and lines of credit," he says. "Banks have to think about acquiring transactions. It's not just the account."

PaySound builds off the checking and credit lines banks already provide. In using PaySound, bank partners will get use of a branded website and digital marketing of products that can include an overdraft-fee-free account combined with a debit card, ATM card and/or checks, ongoing support from R.C. Giltner, and automated underwriting tied to customers' checking accounts. The underwriting software will let customers apply online for installment loans of up to $1,000 without a credit score or up to $5,000 with a credit score. The loans are funded by the bank partner; Giltner's firm provides tools and guidance, he says. They're meant to be marketed the way PayPal's BillMeLater is: as a quick way to buy, say, an iPad on sale. The bank controls the underwriting.

R.C. Giltner Services, which formed in 2012 and has been in stealth mode until recently, announced the broad release of PaySound in late June (several banks are already running earlier versions of the product). Giltner aims to sign up 30 to 50 banks to PaySound by yearend and views it as a companion payments product to existing checking accounts.

PaySound is offering smaller banks a way to join in on the simplistic banking bandwagon — and, like the others, it centers on selling consumers on freedom from overdraft fees. The PaySound program, software and website will be licensed to one financial institution in each market area as a way to stand out from rivals. How that area is defined depends on individual contracts.

Analysts say PaySound touches on something consumers and banks may want, but at the same time, see marketing challenges ahead for its growth plans.

Sam Maule, consulting manager at Carlisle & Gallagher Consulting Group, views the PaySound product as a way for a bank to try to get a new customer base that it could profit on as the bank graduates to additional products. The hard part, he says, could be getting consumers to first sign up.

Ronald Mazursky, director of debit advisory service at Mercator Advisory Group, says the suggested $14.95 pricing seems steep. (It is about 20 cents higher than the average cost in 2012 of an interest-bearing checking account, according to BankRate.com.)

He questions whether a lack of overdraft fees will be enough to win new customers over unless they are serious serial overdrafters. "Most consumers don't believe they will overdraw," says Mazursky.

Still, he views the concept as touching on something that will come more into the banking fold: reimagined checking accounts. They might suit a wider audience then some financial services executives initially believe.

KeyBank, for one, reports that its Hassle-Free account appeals to more than Millennials but declined to get into customer specifics for a product that just launched in June. Even so, the bank is sold on how the new account touches on a need that hadn't been met.

"We are confident we see clear demand for the product in the marketplace," says Michael Wesley, director of consumer segment strategy at KeyBank. "People want simple banking."