It is expensive to be poor. Overdraft fees, which banks have assessed for decades, are a prime example of those costs. But change is in the air. For the first time, several U.S. banks regulated by the Office of the Comptroller of the Currency have begun reforming their overdraft programs and making them more pro-consumer. This development holds the promise of relieving millions of deserving people from the high cost of making ends meet, while empowering them and improving their overall financial health.
Recently, several large banks have announced sweeping reforms to their overdraft programs, leading a race-to-the-top.
These reforms should be just the start. Not all banks have reformed their overdraft programs, and not all reforms are equally pro-consumer. The overall trend, however, is clear: Banks that hesitate to adopt pro-consumer overdraft programs will soon be negative outliers.
As overdraft reform efforts gain momentum and are implemented, bankers should bear in mind several points.
First, banks should resist limiting the extent of their reforms by taking a profit-oriented approach and reverse engineering costs to meet predetermined revenue targets. Such an approach would risk being penny wise, pound foolish. Reforms that take a customer-oriented approach — making the changes that meaningfully empower customers and win their trust — will provide the most lasting benefits to both customers and banks.
Second, banks should use data to identify the reforms that help customers the most. Specific reforms include grace periods that give customers time to cover overdrafts and avoid fees, grace amounts that allow customers to overdraft by certain amounts without a fee, and changes in posting order, i.e., the sequence in which payments are made, to limit repeat fees. Other changes include lower or zero overdraft fees and aggregate limits to prevent fees from becoming high-cost traps, as well as technology upgrades that enable customers to decide exactly which payments are made when, and in which order. Data analysis, coupled with customer feedback, can help banks better understand the degree to which specific reforms contribute most meaningfully to customers’ financial health and empowerment.
Reforms that are most impactful for customers can be most impactful for banks, too.
Third, banks should build on the pro-consumer momentum of overdraft reforms when developing small-dollar lending capabilities and considering new products.
I believe the industry is quickly approaching a tipping point where the majority of banks will soon be either contemplating or implementing pro-consumer overdraft-focused reforms. We are encouraged by this race to the top and the pro-consumer innovation it has sparked. As I recently noted to a large gathering of bankers, you don’t want to be the last bank with a traditional overdraft program.
This is an exciting and promising time for bank customers, their communities, banks, consumer advocates, and regulators. Overdraft reforms are just one of a series of customer-centric actions we are seeing implemented by banks. During the pandemic, banks — especially community banks — played a critical role in facilitating Paycheck Protection Program loans to hard-hit small businesses. Banks have also been actively expanding financial inclusion through the OCC’s
The cumulative effect of these pro-consumer initiatives holds the promise of materially and sustainably improving the financial health of underserved populations and, by doing so, fortifying banks’ reputation for treating all customers, including the most financially vulnerable, fairly and thus earning their long-term trust. In this way, banks can drive positive change and support a virtuous cycle by empowering their customers to create and maintain long-term financial wellness.
