One early learning I had in banking goes back nearly four decades, to the days of COBOL. In setting up an analytic tool for customers and credit cards, the team I was on decided to include a “bad check indicator.” In reviewing a customer credit card record, a simple counter provided an insight into how the household managed their finances. The good news was that bounced checks were an indicator of household financial management, the bad news was that we only used one position to count bad checks.
Who could have guessed that one digit from 0 to 9 would not be sufficient? In testing, the finding was that if the customer bounced 10 checks, the counter would show “0” rather than “10.” The issue was quickly fixed and carried out to three digits. An excellent boss explained the issue and it was a learning experience.
It turns out that once a household budget goes awry, that bad check counter will get a lot of work. In a bad month, one bounced check could cause several others to cascade, pushing the stressed household deeper into debt. So much for the young and naïve.
The story came to mind after today’s read, from the WSJ, titled Overdraft Scrutiny Can Be Opportunity for Lenders.
The U.S.’s Consumer Financial Protection Bureau last week released research that the bureau’s head said showed how “many banks have become hooked on overdraft fees” and promised “action to restore meaningful competition to this market.” That follows lawmaker complaints about fees that banks collected during the pandemic.
When put in the context of big banks’ overall revenue, overdraft fees are often a relatively small component.
Among a group of bigger banks tracked by analysts at Jefferies, the median contribution was just 1.4% in the third quarter of this year.
The contribution ranged from Regions Financial at 4.6% to zero at a handful of banks, according to Jefferies.
Bounced checks are a type of credit, albeit less intentional than applying for a credit card or a line of credit. The tendency in banking now is to offer small-dollar loans, and other such products.
There are also what are known as small-dollar loans. These are intended to be short-term credits, often for less than $1,000. In the past, banks have been reluctant to offer them, often citing fixed underwriting costs that make it difficult to economically extend this credit without terms that attracted regulatory scrutiny. Then regulators last year encouraged such lending under responsible principles, as a way to help consumers during the pandemic.
One solution is for non-banks to market PayDay lending, but the borrowing rates, often annualized at >500%, are even more disruptive to the household budget. Bank of America offers an excellent solution with their Balance Assist product. The BoA website has at least four worthwhile programs intended to serve the market prone to bad checks:
Balance Assist – With this new short-term, low-cost loan, Bank of America clients can now borrow up to $500 (in increments of $100) for a $5 flat fee regardless of the amount advanced to their account. Repayments would be made in three equal monthly installments over a 90-day period. To learn more, review these additional product details and eligibility criteria. Borrowers must have been a Bank of America checking account client for at least one year. Balance Assist is scheduled to launch in select states by January 2021 and in remaining states early next year.
SafeBalance™– Today, over two million clients use this account, which is designed to help them spend only the money they have available. With SafeBalance, there are no overdraft fees, and the monthly maintenance fee is waived for eligible students under the age of twenty-four or clients enrolled in our Preferred Rewards program. Clients can make payments with a debit card or digitally when enrolled in Zelle®, mobile or online banking.
Keep the Change® – Introduced in 2005, Keep the Change was the first program of its kind to help clients build savings by automatically depositing spare change from rounded up debit card transactions into a savings account. Today, more than six million clients use Keep the Change. Over the last 15 years, this program has helped clients direct more than $15 billion in excess change to savings accounts.
Secured Card – This simple and convenient credit card can help clients establish, strengthen or rebuild their credit. Clients can apply for an account with a security deposit of $300. With responsible credit behavior, clients can improve their credit score and, over time, may qualify to have their security deposit returned.
Fiserv has a product line that helps financial institutions navigate the need for short term funding, and their website calls out an interesting statistic:
Eighty-four percent of those with at least an annual need for short-term funds would either move their banking relationship or open an account at a competing financial institution that offered a short-term lending solution
There is an interesting read at the Fiserv site on their services to provide a “Deposit-Based Liquidity Solution,” which is mouthful, but it is simply deposit-based lending.
There is no question that bounced check fees, like credit card fees, agitate regulators. The good news is that there are plenty of ways for banks to serve customers, minimize everyone’s risk, and help keep household budgets intact. And as WSJ mentions:
“These moves could help banks keep pace with online “neobank” competitors, many of whom tout accounts without penalties.”
The strategy worked for Capital One.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group