Come July 1, new rules will go into effect regarding overdraft fees. Here’s an overview of the new rules, courtesy of the Federal Reserve Bank of Atlanta:
The results of consumer tests conducted by the Federal Reserve Board show that most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions unless they expressly opt in. At the same time, testing shows that most consumers want overdraft services to cover important bills, such as checks they use to pay rent, utilities, and telephone bills.
Where does this leave the overdraft product? What strikes me is that this forced communication could become a fine marketing opportunity for banks. The call here is to be creative instituting Reg E in a way that turns a potential negative into a positive.
Here is the challenge with “Innovation”. There are lag time advantages to being first with innovation. I suspect that any large bank that has an “innovative” idea would terminate an employee that divulged it before it was publicly announced. On the other hand, small banks with innovative ideas could share them if they belonged to a trade group that did not have local competitors in it; or, possibly small banks could share local innovation if the idea allowed them to share resources or concepts with small banks positioned against the larger banks. For example, a group of smaller banks sharing a call center or an innovative product from a vendor that needed more scale than a single small bank could provide – perhaps in the overdraft service arena. Smaller banks can react quickly because the decision maker is often in the next room while a good idea can take years to reach a decision maker at a major bank. I do not see anyone offering an idea to the challenge from JJ yet. You may see someone drop overdraft fees in order to get some market share because no one expects a bank to make the tremendous profits in this area for the next year or so. Stock analysts may be happy just to see the banks make lower profits in 2010 and position themselves for the rising cost of money when the Fed raises rates. Checking accounts without interest are a source of low cost funds. How many of the biggest banks are near the 10% limit on their share of US deposits? Unless the rules change, they will have to spend time lowering their cost of deposits because they will not be able to add more US deposits. Lots of opportunity to do this with “innovation”. It is still knocking.