CFPB Getting Ready to Decide if Overdraft Fees Friends or Foes

by tom 22. January 2015 18:54

More attention is being focused on overdraft fees with new rules for overdraft protection pending from the Consumer Financial Protection Bureau (CFPB) later this year. An article that appeared this week in Credit Union Timesnotes that scrutiny on overdraft fees is an agenda item that has been moved for consideration later this year. And the article references a letter from New York Representative Carolyn Maloney to CFPB Director Richard Cordray urging the CFPB to extend opt-in rules to cover overdraft fees, just as they cover ATM and point-of-sale transactions now:

“Maloney, the top House Democrat on the Joint Economic Committee, also urged the CFPB to adopt rules requiring overdraft fees to be “reasonable and proportional.” She noted that small overdrafts of $24 were charged a median overdraft fee of $34, yielding a 17,000% interest rate on an overdraft resolved within three days.”

There are many who note that this argument is flawed and although the math indicates there is a 17,000 percent interest fee, the amounts are typically much small and these fees are not incurred as frequently as an ATM or debit-card transaction fee. Opting in for debit card fees means no surprises, since consumers make a conscious choice to use debit cards. Opting in for overdrafts is a tougher argument since the fee is only imposed when consumers exceed their account deposits, usually because they aren’t paying attention.

As CU Times notes, it’s inertia that keeps consumers from opting out of overdraft fees. The fees are only a surprise when they are imposed, but most consumers appreciate the protection when they need it – consider the repercussions from both an overdraft fee and a returned check for non-sufficient funds (NSF).

What makes this such a concern for banks and credit unions is the amount of revenue at stake. In the current economic climate with interest rates slow to recover, overdraft and NSF fees are providing much of the revenue for banks and credit unions. In fact, banks collected over $30 billion last year in overdraft fees.

Based on our own fee research, we are seeing a drop in banks and credit union fees for overdrafts and NSF, probably in anticipation of the coming CFPB rules. So where do banks and credit unions make up the difference?

They could charge more for services that consumers have shown they want. There are services such as mobile banking, peer-to-peer payment, identify security, and same-day deposit that offer real value to customers, and for which they are willing to pay a premium. Shifting attention from concerns about opt-out versus opt-in fees to promoting new, more valuable services is one way to generate more revenue.

Should overdraft and NSF fees become opt-in only, aggressively marketing the need for overdraft protection is another strategy. Not all customers will want overdraft  protection, but the benefits of such protection are clear, and creative packaging can help overcome customer resistance.

We are conducting more research on fees and will have more insight on this issue in the coming weeks. We hope you keep reading so we can share what we learn about fee trends.

The Latest from ProductBuilder Alert

If you want to learn more about competitive fee products, be sure to subscribe to our free weekly ProductBuilder Alert where we share insights about new products from banks and credit unions. Market Rates Insight maintains ProductBuilder as an ongoing database of new bank and credit union product ideas to keep clients up to date on new revenue ideas. Here’s a sample from this week’s ProductBuilder Alert:

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Banking Trends | Fees | ProductBuilder Alert | Regulations

Weekly Term Accounts APY Spread and Premium Index-Jan 19

by tom 20. January 2015 16:17

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Interested in the latest new banking product ideas? Subscribe to our weekly ProductBuilder Alert.

Banks Facing a New Conundrum: “What Do We Do About Fees?”

by tom 15. January 2015 17:12

There was a time when fees made up the lion’s share of bank revenue. Until recently, overdraft fees and fees for non-sufficient funds were providing most of the revenue to banks, especially with rates continuing to remain at record lows. But the revenue stream from service and overdraft fees has dwindled to a trickle thanks to new market challenges.

Overdraft fees have consistently been one of he biggest moneymakers, and according to Moebs Services the median fee for overdrafts hit $30 in 2014, up from $25 in 2008. Some banks are charging as much as $37 for overdrafts. At the same time, the number of overdrafts fell to 1.1 billion last year, down from 1.5 billion in 2008.

There are are various reasons that both the number of overdraft fees and the revenue from fees have declined:

1) Consumers are wiser. The boom in mobile banking makes it easier than ever to check account balances and move money to cover overdrafts before they incur fees. Plus consumers are turning to new resources such as prepaid cards and electronic payments both for convenience and so as not to incur unwanted fees.

2) Banks are more fee-wary than ever. There has been an ongoing customer backlash over fees. According to the Pew Charitable Trusts 40 percent of consumers took action last year because of overdraft fees. Although some went to extremes, such as closing their accounts, many complained to their banks and had the fees refunded; better to pay a refund than lose a customer.

3) Regulatory watchdogs are watching overdraft and non-sufficient fund (NSF) fees. The Consumer Financial Protection Bureau (CFPB) has determined that overdraft fees need closer scrutiny and banks have started backing off on overdraft fees as a result.

To maintain their revenue stream, banks are going to have to consider new, more creative ways to make money, and they are going to have to take a closer look at the competition for fees.

A number of banks have already started to diversify their services and offer new products, many of them fee-based. Offered tiered checking, for example, with premium services. Others are diversifying by offering investments, bonds, mutual funds, and IRAs to increase share of wallet and generate revenue.

While overdraft fees are not likely to go away, they will continue to evolve. Banks are going to have to take a closer look at their competition to align their fee structures, not only to make sure they aren’t leaving revenue behind but to assure they are in the same ballpark to justify their fees to regulators.

The market is changing rapidly, which means banks need to be able to respond faster with greater transparency. Market Rates Insight is in the process of developing new research tools to help banks and credit unions deal with the fees conundrum, so watch this space in the coming weeks to learn more about how we can help you with fees.

The Latest from ProductBuilder Alert

If you haven’t subscribed to our free weekly ProductBuilder Alert, here is a highlight from this week’s report. Market Rates Insight maintains ProductBuilder as an ongoing database of new bank and credit union product ideas to keep clients up to date on new revenue ideas.

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Fees | Consumer Confidence | Banking Trends

Weekly Term Accounts APY Spread and Premium Index–Jan 12

by tom 12. January 2015 17:35

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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APY | National Pricing Indicator | CD rates | Deposit Products

Using Technology to Power the “Cool” in Next-Generation Banking

by tom 8. January 2015 13:31

We have been writing about mobile banking and digital banking technology on a regular basis in this weblog. Technology is shaping the future of the banking industry, and technology-driven upstarts such as Apple Pay are having a dramatic impact on the way consumers think about their relationships with their banks and credit unions. One perspective on the future of digital banking was presented this week by Chris Skinner, author of Digital Bank, in a contributed an article on “Creating a Bank that’s Both Cool and Fair” for American Banker.

Skinner argues that for a 21st century bank to be “cool” it has to offer apps that simplify personal finance management, make it easy to authenticate users without account number and passwords, and reward customer loyalty in new and innovative ways. Many of these ideas jibe with what  the industry experts see for the coming year, so let’s take a closer look at some of these trends and the “cool” factor for tomorrow’s banks.

Convenience is a good place to start. What is driving online and mobile banking is the convenience factor for  consumers, and the simpler and more convenient banks can make transactions the better for their customers. Skinner predicts that banks will start using personal space and new technology, like voice prints, to authenticate customers. We are a long way from there, but simplifying authentication while improving security is clearly essential.

As smartphone technology evolves biometrics and other types of encryption and authentication will make mobile banking easier, and more secure. Banks also will get smarter about profiling their customers, and technologies like big data will not only play a role in developing new products and strategies, it also will help authenticate users based on known profile information about location, spending habits, and more. Mobile and online transactions will become simpler as security technologies and protocols improve until we get to the point where you can make a transaction with a finger swipe or a single click.  For the time being, bankers are going to continue to partner with payment partners like Apple to handle mobile transactions and promote mobile convenience.

Promoting the “cool” in next generation banking is going to be important for banks and credit unions to compete with prepaid cards and other types of emerging financial service offerings. Starting with the digital channel, rather than adapting conventional banking protocols to the digital world is one place to start. Innovative financial institutions are going to start with digital first and worry less about their brick-and-mortar business.

Skinner also suggests that cool banks will do a better job of treating their customers as human beings. This is going to require a cultural as well as a technological shift in many cases, but technology can bring financial institutions closer to their customers. Social media has already started to play a role in connecting customers to their banks. The challenge now is to personalize mobile and online banking, giving customers the assurance that their personal needs are being considered with custom product features and unique specials.

Loyalty programs are going to evolve with the aid of technology. Customers will be able to choose from new types of rewards that better suit their lifestyle, whether it’s cash back, special offers from retail partners, or donations to worthy causes. Personalized offers coupled with convenience are going to be the new cool.

So how do cool banks make their cash? With the recent economic downturn deposit rates aren’t generating revenue, and sources of fee revenue are coming under increased scrutiny. Maybe it’s time for banks and credit unions to rethink their customer approach. Rather than charging customers for services they don’t want, identify services they are willing to pay for and tie new revenue sources to convenience and value. Rather than relying on NSF revenue, for example, progressive financial institutions will work with customers to identify new convenience-based services that are worth a premium. They also will partner with retailers and others to offer deals on loans and credit card transactions, or to include a premium for convenience banking services. The revenue model for banks and credit unions will evolve into opt-in consumer fees and third-party revenue streams rather than forcing customers to pay to use their money.

What do you see as the key drivers for the “cool” banks of tomorrow? Where is technology going to have the greatest impact?

The Latest from ProductBuilder Alert

To help our bank and credit union clients stay up to date with new sources of revenue, Market Rates Insight maintains ProductBuilder as an ongoing database of new bank and credit union product ideas. You also can subscribe to our free weekly ProductBuilder Alert with the latest banking product ideas. Below is an excerpt from this week’s ProductBuilder Alert:

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Weekly Term Accounts APY Spread and Premium Index–Jan 5

by tom 5. January 2015 16:31

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with  greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Top Banking Predictions for 2015–”Technology” Is the Watchword

by tom 31. December 2014 17:07

Jim Marous, Publisher of Retail Banking Strategies, has released the results of his fourth annual survey of bankers, credit union executives, and financial experts to identify retail banking predictions for 2015. I recommend you read the original article – the insights are quite interesting – but the consensus is that 2015 will be the year that banks and credit unions will play digital catch-up. The age of digital banking is here to stay, the those who thrive in this brave new world won’t just adopt new technology platforms, they will understand how technology is having a fundamental impact on consumer attitudes about banking and how to use technology to promote better customer engagement. In other words, it’s not just about assembling the right tools; it’s also about knowing how to apply them.

After compiling insights from banking experts around the globe, Jim observes:

“Two of the most omnipresent trends evident in this year’s predictions were the heightened use of customer insight for the delivery of services and an enhanced customer experience, and the continued development of digital channels and associated digital services.”

We often comment on trends in digital banking in this blog, and digital disruptors are going to continue to change the face of banking. Jim’s top 10 predictions are mapped out in some detail in his own blog entry, but there are a few elements that stood out:

Consumer analytics – Knowledge is power and bankers are using newfound knowledge to improve consumer satisfaction and the customer experience. Fewer than 40 percent of bank customers have reported a positive experience with their bank; a figure that should concern bankers since new competitors outside of banking are competing to handle consumer transactions.To improve customer satisfaction, banks will increasingly move toward interactive and intelligent banking.

Banks and credit unions are learning more from their retail brethren. They are striving to deliver an “omnichannel experience” that delivers a consistent and satisfying interaction no matter what the channel. Research and analytics will tell banks and credit unions more about their customers so interaction and product features can be customized to meet unique needs.

One of the most important disruptive technologies to affect banking in the coming year is going to be big data. Big data has been around for a a few years now, but this year more financial institutions will be adopting big data analytics and related technologies to learn more about their customers and customize their banking experience as much as possible.

New digital channels – As part of the migration to support omnichannel banking there will be more digital channels than ever. Social selling and online interaction is sure to increase as banks move more aggressively to reach customers through online channels. The use of video for customer interaction will likely increase, including the use of “virtual” tellers and video for one-to-one consultation.

Consumers are doing everything online. Online holiday retail sales in 2014 hit a new record high both in web sales and mobile sales. Consumers are becoming more comfortable with online transactions, and despite the high-profile data breaches of 2014, they want the convenience of online and mobile banking. (In fact, one of the 10 predictions for 2015 was the application of technology to promote better security and authentication for online transactions.)

More mobile bankingMobile technology is arguably the most disruptive technology to affect banking in recent years. Recognizing that mobile will continue to grow as the channel of choice for many customers, banks are going to start adopting a “mobile first” strategy, expanding mobile banking options and making mobile their first means to reach customers rather than an afterthought. Mortgages, loans, retirement planning, financial advice, and more will become part of the mobile experience.

Mobile transactions are also going to gain momentum. There are multiple mobile wallets out there vying for dominance – PayPal,Google Wallet, and others. Industry watchers are keeping a close eye on Apple, Pay to see how it performs so they can find the best way to incorporate smartphone transactions into their customer service strategy.

The whole point is that disruptive technology is only a means to an end, and that end is better customer engagement to promote revenue growth. Consumers are demanding more and more convenient access to money and seamless transactions. Those who can develop the right formula to synthesize technology with customer value will become the market innovators in the year to come.

Weekly Term Accounts APY Spread and Premium Index–Dec 29

by tom 29. December 2014 16:09

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Weekly Term Accounts APY Spread and Premium Index–Dec 22

by tom 24. December 2014 14:28

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index
The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum

image

Premium Index
Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Saving Interest Expense on Designer CDs

by tom 22. December 2014 10:47

This article was written for BAI Banking Strategies by Dr. Dan Geller, executive vice president for Market Rates Insight.

A rate comparison of the five most common “designer” CD types with the rate of the fixed-rate CDs, which offers no special features, shows that the national average rate of four designer CDs is exactly at the same as for fixed-rate CDs at 0.42%. The only exception is the withdrawal-no-penalty designer CD at 0.40%. This means that for the privilege of liquidating this CD before the end of its term, and within the grace period, customers are paying only a two basis point (bp) premium.

Designer CDs include special features designed to alleviate some of the concerns consumers may have about committing their money to a specific time period. Most notably, they offer flexibility and a hedge against rising rates. However, the special features on designer CDs are free to consumers because institutions are offering them at the same rate as fixed-rate CDs that have no special features. By lowering designer CD rates by five to 10 bps, depending on the term, institutions can emphasize the value of these special features and save on interest expense at the same time.

The five most common designer CDs, are: Add-to CD (the option to add additional funds to the CD during its term); Bump CD (the option to bump the rate of the CD during its term if the institution offers a higher yield for the same term); Indexed CD (the option to tie the CD rate to a major index such as the S&P 500); Step/Ladder CD (allowing consumers to gradually increase the yield by increasing the term and tier of the CD); and Withdrawal no Penalty CD (allowing consumers to liquidate a CD before the end of the term without paying a penalty).

Consumers do expect to pay a premium for special features. Consider this example from the auto industry. If a standard car costs $25,000 and you are opting to add special features such as leather seats and sun roof, would the price of the car stay the same? Of course not. Consumers expect to pay a premium for special features, which is something banks and credit unions are not practicing right now. In the current rate environment, designer CDs should have been priced five to 10 bps below the fixed-CD rate in their respective markets.

One quick disclaimer: this is a macro analysis that uses the national average rate of CDs of one to five years. It is plausible that there is a rate differentiation between the fixed and designer CDs in some regions and/or in the case of some individual institutions. However, in the majority of the cases, based on the national average, there is no such rate differentiation.

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Banking Trends | CD rates | Deposit Products


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