To the Editor:
Overdraft coverage programs have generated some highly charged discussions in recent issues of American Banker, like Tom McGraths Overdraft Coverage Preys on the Weak [Viewpoints, April 6, page 16].
We present the advantages of such programs in terms of our service and software because our program is the only one we can fully represent, but we believe other overdraft coverage programs can offer many of these benefits.
Overdrafts are a fundamental part of banking today, and the process for managing overdrafts in many banks without well-defined overdraft coverage policies and procedures is subjective, inefficient, and unfair to customers. Overdraft coverage policies and software provide a well-defined program that treats all customers fairly.
All types of customers experience insufficient fund (NSF) items, and these customers typically make up 20% to 40% of a banks customer base. Today on average banks have more than two NSF/OD items for every personal checking account.
The majority are paid by banks, meaning the banking industry already has a huge volume of overdraft activity. Covering most NSF items, and charging a fee whether the check is paid or returned, has been a customary process for a very long time.
Some may argue that customers should use lines of credit or transfers from other accounts to avoid overdrafts.
First, these services in many instances are marginally profitable at best. Second, the customers who incur NSF items are often reluctant to apply for overdraft protection, and they may not qualify; fewer than 20% of customers nationwide have signed up for protection services. In many cases, customers with overdraft protection simply run through the protection level and then incur NSF items.
Some might argue that prudent banks should just return all checks that arrive in accounts with insufficient funds and protect the customer. This will hasten the loss of valuable, responsible customers and do little to change behavior. There are unlimited ways customers can duplicate the results of an overdraft check in the marketplace, and banks would simply be driving customers into the arms of nonbank competitors.
Bankers may wish that such large numbers of customers would not use these methods to extend their paychecks, but that horse has left the barn. The demand exists, and the best way for banks to assure customers do not use unsavory services (such as payday-loan companies) is to offer customers a more attractive alternative.
What is wrong with many overdraft processes is the ad hoc methods that banks use for deciding when to pay or return a NSF item. A check for a similar amount may be paid for a customer in one instance and returned in another. Valuable officer time is wasted, and customers are left confused and frustrated.
Many large banks have recognized this problem and taken the positive step to implement matrices to formalize discipline in the overdraft process. Yet these banks go out of their way not to tell customers how the pay-or-return decision is made.
If you ask customers about overdrafting, its fees, and its consequences, they say they want banks to disclose the criteria for paying and returning checks, as well as the related fees, and to allow customers to make their own decisions.
More specifically, they say in focus groups to banks: If I am willing to pay the going fee when I have a check of a small amount arrive a little before a deposit, why cant my check be paid and I be treated consistently like some of your other customers, even though your branch manager does not know me personally? It seems like a fair and just request.
Overdraft coverage programs provide a much-needed safety net for the small percentage of customers who experience financial difficulties. Rather than charging them off, as many banks do now, our program offers them an interest-free loan with extended terms and removes them from the program to clean up their overdraft balance. There is absolutely no evidence that overdraft coverage causes undue risk for the bank or its customers. Today nearly 90% of all overdraft items clear up with deposits in a short period of time, and nearly all of the remainder clear up in less than 30 days.
Actual chargeoff rates are less than with many credit card portfolios and some loans offered by banks. The average amount charged off is about $300, and no bank forces foreclosure for these funds. At worst, a person simply has to repay this amount before opening a checking account at another bank.
However, most banks are aggressive at charging people off after 20 or 30 days, causing customers to lose their checking accounts. Our overdraft coverage program offers an interest-free loan and easy repayment terms to customers in financial trouble, enabling them to clear up the overdraft and retain their checking accounts. Overdraft coverage programs do not recommend paying checks high to low. Instead, the programs are driven by customer decisions, not the banks decision, and have a successful history of regulatory and legal acceptance. We recommend paying checks in the order in which the customer wrote them.
Overdraft coverage is better for customers and better for banks. It levels the playing field by full disclosure and fair and equal treatment for all customers.
It is not surprising that these programs are achieving rapid adoption by banks and high ratings by customers.
Bob Giltner
Barrett Nichols
Senior officers
Bank Strategy Group
Lousiville, KY
Mr. McGrath replies:My criticism was directed at banks that use overdraft practices to lure low-balance accounts and then employ targeted marketing and operating practices to induce overdrafts for the fee income. It was also directed at consultants who counsel them to do so.
The rationale offered by proponents of this approach is transparent and unconvincing.
Furthermore, to rationalize the inducement of customers to mishandle their accounts by suggesting that everyone overdrafts in modern banking is intellectually and managerially bankrupt. Overdrafting is more prevalent today because a competitively challenged group of bankers went out of their way to attract low-balance accounts that will frequently overdraft.
We will rue the day we started down this path, and will ultimately regret our willingness to ignore the harm to our reputations and credibility.
The industry should be focused on educating the communities its serves about the proper use of credit and other banking facilities, including transaction accounts. We need to capture the high ground for a change, and reform ourselves before someone else does it for us.
Tom McGrath
Managing partner
Bank Earnings
International LLP
Orange, Va.
