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What Should Your Innovation Focus Be?

As I have recently been speaking at regional conferences on how financial institutions (FIs) need to get more innovative, I get asked about what should be the target of initial innovative discussion.  After all, most FIs are not regularly having discussions about innovation, so it is natural that they would want to have some template to follow to get the innovative ball rolling so to speak.  This article is going to focus on two things, (1) providing a template for the initial focus on innovation within the institution and (2) applying that template. In this blog we will use the Future of Overdraft Fees as our topic of discussion.  If you were at Summer Conference recently, you heard me talk about this as a part of my presentation on Achieving the Innovation Mindset.

In an earlier blog post, I highlighted the attack that is underway related to overdraft (OD) fees.  If you have not read that article, you can do so here Death of Overdraft Fees. In June of 2021, U.S. House Rep Carolyn Maloney reintroduced the Overdraft Protection Act, which among other things, would have limited banks to charging only one overdraft fee per month or a total of 6 per year. Only a few weeks ago, thanks to the lobbying effort of the ICBA and other state and regional community bank advocates, changes to the regulations governing overdrafts were removed from pending house legislation. While this has been pulled for now, we are sure this is not the last time we will hear about overdraft legislation.

A little background: what started as a couple of larger national FIs that were reducing OD fees and terms or eliminating OD fees altogether has swelled to a significant number of larger players.  Since these national players use their universal approach to advertising, it is a good bet that your customers are hearing about this trend.  Moreover, the CFPB and the FTC have both initiated inquiries into the OD practices of FIs.  Their approach seems to be that if an FI has significant OD revenue, then they must be doing something inherently wrong (or bad).

Smaller institutions may naturally have a larger percentage of their income from OD fees due to the limited number of additional fees that they may be charging as compared to larger FIs.  Plus, they may have customers that use overdrafts as a part of monthly money management.  I find it interesting that nowhere in the CFPB literature railing against overdrafts does it talk about the impact to low income or otherwise disadvantaged customers whose transactions are rejected in lieu of an overdraft program.  Further, overdraft fees subsidize a significant amount of other services that financial institutions do not specifically charge for, such as branches, Reg E guaranties on credit card charges, etc.

OK, enough background, how is your institution going to tackle this issue.  Here is the list of elements that will be a part of your innovation plan on overdrafts:

 

  • Data Gathering
  • Competitive Intelligence
  • Brainstorm OD Changes
  • Brainstorm Revenue Replacement
  • Explore Truly Crazy Ideas
  • Prepare a Strategic Recommendation for Sr. Leadership / Board
  • Act!

 

Data Gathering – In this example I have begun the process of data gathering for you by writing this article. But there are many resources available that offer information or opinion on the overdraft issue.  Assign someone in your institution to be the repository of gathering up this information. Utilize a web “sniffer” to scan and identify articles and other web info that relates to the OD issue.

Competitive Intelligence – This is similar to the data gathering step but is more specific to what the FIs in your markets or service areas are doing related to overdrafts.  What are they charging? Do they offer any specific overdraft protection programs? Have they eliminated overdrafts or announced they will do so?  Find out everything you can about your local competitors related to overdrafts so that you can create a competitive comparison chart.  Note: even if national and regional FIs are not specifically competitors, if those entities are advertising in a manner that your customers and prospects see and hear that messaging, via traditional or social media marketing, then you should include what they are offering in your competitive intelligence gathering.

Brainstorm OD Changes – Perhaps your institution’s OD fees and how they are charged has not been examined in many years.  Take the opportunity to brainstorm how you might change your fees and when they are applied.  OD Fees average about $25 across all FIs in the U.S., with some institutions charging north of $40 per OD or NSF.  Perhaps it is not necessary to jettison OD fees altogether but you could adjust how much and how frequently you assess these fees.  You could examine the number and frequency of ODs and elect to create some new account types that specifically assist customers that seem more prone to overdraw their account with reducing the incidents of OD and normalizing OD fees.  That could include specific elements of education and the ability to predict overdrafts and alert the customer to the likelihood of an overdraft before it occurs. Get creative and come up with a lot of ideas, then circle back to the relevant banking regulations to ensure that whatever you might ultimately roll out will pass muster with compliance.

Brainstorm Revenue Replacement – While making adjustments to your OD structure may make sense, you should also be thinking about other types of services you could offer that would generate revenue to replace current OD revenue.  Banks are for-profit businesses and we shouldn’t be embarrassed by charging fair fees for the valuable services we provide. However, since people think about money management differently than any other product or service, we do need to consider how our fees are perceived.  Certainly, the CFPB and other agencies see overdrafts as punitive; depending on how you are communicating OD fees to your customers, they may feel the same way.  Setting aside any changes that you make in your OD fees, if maintaining revenue is an important element for your institution, then brainstorming revenue replacement may be warranted.  During my presentation at Summer Conference, I threw out the idea of examining your debit card program as a likely candidate of where additional revenue may be forthcoming. Mike Holt of PRI followed me on the program and shared a 5 step process for how to gain additional revenue from your debit card program.  If you want to access Mike’s presentation from the conference, please contact your FNBB Relationship Manager.

Explore Truly Crazy Ideas – I am serious about this!  We have to get over our inherent self-editing and allow for radical, truly out of the box thinking to occur. That means you must not only encourage these crazy ideas but ensure that in no way will they be ridiculed, even inadvertently.   Crazy ideas may not be worth implementing but in my experience, when an organization allows crazy ideas to flow, it sparks overall creativity to flow, opening up the spigot of innovation to get some really interesting ideas on the table.  Maybe you consider a way for customers to build up an OD reserve, such that if and when they have an actual overdraft, their “reserve” account will “cover” the fee.  Crazy?  Perhaps, but when we open up to any possibility, it will lead to new ideas that may ultimately generate something that sets your institution apart.

Prepare a Strategic Recommendation – As previously mentioned, anything that is proposed for changing how ODs are assessed at your institution must pass compliance muster.  Once you have worked through all of the ideas and you have a set of changes that you want to propose, run it through your compliance team or outside resources.  Don’t let compliance talk you out of making changes or suggest that something “can’t be done”, but do make sure that you are creating a recommendation that aligns with all national and state banking regulations.  Write out your recommendation and include what the positive and negative impacts to revenue and expense would be, along with your competitive analysis.  Changes to OD fees is a big undertaking and it should be done with a “eyes wide open” approach to all facets of overdraft and associated fees.

Act! – Once you have created your recommendation and it is approved for implementation, then act!  Don’t hesitate to roll out your new program, but ensure that all elements of marketing, including social media marketing, is aligned to provide the appropriate communication to your customers and prospects about the changes to your overdraft program and/or its new features..  Create some interviews with customers who will be directly (and positively) affected by the changes and include these in your marketing rollout.  Meet with area civic leaders to make sure they understand the positive ramifications of the change.  Educate all staff so they can advocate for the new program and be able to answer questions about it.  Boldly move to implement the new overdraft services and find any and all ways that you can use the changes to highlight the institution’s innovation and ability to provide a high level of customer experience.

I hope that you found this article useful. Regardless of whether you are taking on the overdraft issue or any other significant change in your service offerings, you can use the template provided above as a high level methodology.  If you have any questions about how to perform any of the steps, reach out to me at dpeterson@bankers-bank.com.  I would be glad to setup a call to discuss your specific situation and provide any appropriate assistance.  I look forward to hearing from you!