By Richard Miller
Executive Vice President of JMFA
Ask credit union about its mission and it will likely include “service-centric” or some variation of the idea. It’s something all smart institutions strive for. But excellent service doesn’t happen in a silo or start and end with tellers. It’s an all-encompassing idea that should be at the forefront of every decision and every offering.
Yet some financial institutions forget this part of their mission when it comes to providing a solution for overdrafts. Some overdraft programs – defined by data-driven algorithms that calculate unique and ever-changing limits for each account holder – seem designed to fail important service expectations. By contrast, fully disclosed overdraft programs with static limits offer a simple solution that empowers account holders to make informed financial decisions.
Let’s compare how each method of overdraft protection delivers on serving an account holder’s best interest.
With a data-driven overdraft solution, limits vary for each account holder based on factors like average daily balance, direct deposits, etc. These limits change as the data changes. So how can your account holders ever know how much they could overdraft? Unfortunately, they can’t. “Data-driven” feels safe to some institutions, and provides the feeling of having control, but it comes at the expense of providing first-rate service.
In a fully disclosed overdraft program, the limit is the same for everyone, all the time. Predictable, steady and reliable — all things that account holders appreciate and count on.
Ability to Repay
While there’s an argument to be made that individuals with higher balances may be less risky overdraft users and therefore deserve a higher overdraft limit, I think this makes too many assumptions. Your account holders could have accounts elsewhere, have varying degrees of liabilities, or any number of other scenarios. The ability to repay is based on a lending process to determine credit worthiness. We can’t know everyone’s financial story from one account snapshot, so from a service standpoint, it only seems fair to treat all account holders equally.
Moreover, overdrafts are not subject to Truth in Lending regulations, so care should be taken to avoid the appearance of a credit product.
Overdraft programs without an established limit by their very nature cannot be fully disclosed — no limit can be stated at the beginning because it frequently changes.
Fully disclosed overdraft programs require account holders to opt in before ever using them. Being transparent upfront gives individuals the power to make an informed decision about whether to use the service or not.
Ever try to explain something you don’t fully understand? How about trying to do so to an upset account holder who keeps getting more confused by what you’re saying? It’s not fun, and it is bad for morale. Data-driven overdraft solutions are designed to be unexplainable in simple terms — they’re highly technical, with ever-changing limits based on information a person may be uncomfortable being judged on.
For a more service-centric option, an overdraft program with simple rules that can be explained to an individual easily and concisely fits the bill. Employees will remain poised and confident during inquiries.
Bottom line: You can’t offer great service if you can’t even explain your service to the people who use it.
Account Holder Understanding
If your employees can’t explain your service, how is an account holder ever supposed to understand it?
Do you want your account holder leaving confused, frustrated and suspicious? Or do you want them to feel empowered, grateful and satisfied – which will lead to trust, loyalty and advocacy of your institution to others.
The solution is clear: If you want to offer excellent account holder service, offer an excellent service to your account holders. Fully disclosed overdraft protection programs line up with service-centric missions. And, if all else fails, use this litmus test: If I had limited funds available and needed to use an overdraft program, which type would I rather rely on?
About John M. Floyd & Associates
For the past 38 years JMFA has been considered one of the most trusted names in the industry helping community banks and credit unions improve their performance and profitability. Whether it’s recovering lost revenue, uncovering savings opportunities, serving your account holders better, finding the perfect personnel fit or delivering a 100% compliant courtesy pay program, JMFA has the right solutions to help you not only meet, but exceed, your goals. We are proud to be a preferred provider among many industry groups.