WHAT IS OVERDRAFT PROTECTION AND HOW DOES IT WORK?

Believe it or not, apparently there are millions of checking customers who are unable to answer this question.

Data emerging from a recent landmark study on overdraft protection conducted by ACTON Market Intelligence tells us that only 28% of bank customers in America are "absolutely certain" they understand their financial institution's overdraft protection program. ONLY 28%.

This should be an alarming statistic for most bankers and their co-workers in the marketing department.

Even more alarming is the reason or reasons behind this piece of data.

Is it due to the fact that a majority of banks and credit unions have simply chosen to be less than forthcoming about their overdraft programs?

Is it possible that these programs are so complicated and convoluted that customers are simply unable to comprehend them?

Or does the fault lie with the marketing folks? Have they failed to adequately inform checking customers about overdraft protection – what it does, how it works, what it costs, and why is it necessary?

Most likely it's a combination of all three possibilities.

Bottom line, overdraft protection is about as simple a product as safe deposit boxes. Yet for some reason, while almost every banking customer fully comprehends the purpose of a safe deposit box and can easily understand the financial institution's pricing structure, these same customers are in the dark about the bank's and credit union's overdraft protection program and exactly what an initial overdraft can end up costing.

Unfortunately for the banks and credit unions, this consumer confusion and uncertainty has resulted in the federal government making a major change to Reg E – resulting in the need for these institutions to contact every checking customer multiple times about their overdraft protection and the need to opt-in if they wish to keep a service most don't even understand.

It's best described as a surreal situation.

Worse yet, the changes to Reg E's overdraft section won't require banks and credit unions to make all the necessary changes to bring price and structure simplicity to their overdraft protection product.

While the feds were busy addressing the obscene NSF fees assessed to some careless checking customers, they missed looking at the bigger picture. Had the feds done some research, they might have discovered that while fees were a problem, they weren't the most significant problem.

The most significant problem is that financial institutions have taken what should be a very simple product and turned it into a more complex layering of overdraft protection options supported by high fees and a reordering of the daily processing of credits and debits favoring the banks and credit unions.

Adding to this problem is the lack of information on many bank's and credit union's overdraft protection options, how they work, and their pricing. If you don't believe this, visit a random selection of small to medium-size bank and credit union websites and do a search for overdraft protection.

The end result is a service favoring the institutions' fee generation engines at the expense of their checking customers' comprehension of how the product works and why they should pay for this valuable service.

The cloak of secrecy needs to be lifted from overdraft protection immediately. This is especially true as it relates to pricing.

PRICE ELASTICITY OF NSF FEES

Given the wide disparity in overdraft and NSF fees charged, a case could be made that a majority of bank marketers either have little or no familiarity with the economic concept of price elasticity or simply choose to ignore it.

And the same is most likely true about anyone working for a bank or credit union who's involved in making or approving pricing decisions.

Further proof can be found in the ridiculously high overdraft fees charged by some financial institutions – particularly the mega-banks.

For what seems like a long period of time dating back to the early 1970s, the NSF fees assessed by banks and credit unions fell in the $12 - $15 range.

These fees held relatively steady before the fee greed mentality set in sometime in the mid-to-late 1980s.

For you readers unfamiliar with price elasticity, the economic concept is that every product and service has its own elasticity of demand curve based on price. Or stated another way, price elasticity measures the sensitivity of demand changes to price changes.

For example, because it's a necessity for most consumers, the demand for and use of gasoline is fairly price inelastic in a wide range of prices. But, at some point – let's say $4 a gallon – consumers will start to use less gasoline. At this point, price elasticity sets in and as the price continues to rise, the demand continues to fall.

At issue here is the price elasticity of overdraft and NSF fees.

It has always been your newsletter editor's contention that there is significant price elasticity to the overdraft or NSF fee.

A lower fee results in a greater number of overdrafts while a higher fee results in a lower number of overdrafts.

In layman's terms, a $12 overdraft fee seems reasonable and results in fewer customers seeking a fee waiver. On the other hand, a $35 overdraft fee seems draconian. Such a high fee not only causes some customers to be more diligent about avoiding an overdraft situation, it also results in many more complaints and requests for a fee waiver.

Of course, such rational behavior depends on consumers having ready access to, and knowledge of, the prices or fees being charged.

Unfortunately, for a majority of checking customers today, such price familiarity doesn't exist.

Making the situation worse today is the cascading of overdraft fees resulting from punitive item processing arrangements such as processing withdrawals before deposits and processing the largest withdrawals first.

This latter issue is already being addressed by some of the mega banks, like Bank of America and Chase, and hopefully will trickle down to all financial institutions involved in this behavior.

In the meantime, it is critical that bankers revisit the basic overdraft fee amounts assessed.

Apparently, this fee reassessment has already begun.

An example of fee reassessment and price elasticity appears in the article, "ING banks on luring consumers fed up with paying big overdraft fees to rivals," discovered in the March 1, 2010 issue of Advertising Age. See sidebar to the right.

The relevant information was provided by well-known banking expert Michael Moebs, CEO of Moebs Services.

Under the bold subhead "FEE CUT A POSSIBILITY," Moebs shared information on the results of a large regional bank in the South that took his advice and lowered its overdraft fee from $24 down to $12. According to Moebs, the bank had increased overdraft revenue by 16% by the end of the year.

Mind you, a $24 fee is already low by industry standards where the average fee charged by the mega-banks is $35.

Most banks and credit unions would have refused to lower their overdraft fee to $12.

In effect, by charging 50% less, the bank actually generated more revenue.

This demonstrates the price elasticity of overdraft and NSF fees.

The lower the fee, the more likely the consumer will overdraft and gladly pay the $12 fee without complaining or calling to beg for a waiver.

What is the price elasticity of your NSF fees? At what level will your customers opt-in or opt-out under the new Reg E legislation?

What is the NSF Sweet Spot – the fee price point that will deliver optimal NSF income?

Answers to these questions are available in the recent, landmark study on overdraft protection conducted by ACTON Market Intelligence. See the sidebar to the right for more information about this study and how to obtain your copy.

DIFFERENTIATION VIA OVERDRAFT PROTECTION

After all the dust settles on the implementation of Reg E, there will be an opportunity for community banks and credit unions to use their revised overdraft protection product as a meaningful point of differentiation.

Why so?

Because some number of banks and credit unions will cease offering overdraft protection while others will cling to their existing stealth programs that are well-kept secrets and tough to decipher by their customers.

These inconsistencies in providing overdraft protection information are covered in the April 2, 2010 blog titled "What's Behind The Missing Overdraft Protection Information" available here.

The winners will be those financial institutions that offer a meaningful, yet simple, program offering two or more options that are fairly priced and perceived as a good value by their checking customers.

Unlike today, such a desirable overdraft protection feature should be included in all checking account marketing and solicitation materials. After all, it's a feature that's just as desirable for many of your customers as a debit card and online banking.

At its core, overdraft protection is really the only insurance policy your customers can acquire that costs nothing until they actually use it.

A few smart banks and credit unions will figure out how to elevate their overdraft protection service from its present position at the bottom of the features list to a position at or near the top of the list.

In today's struggling economy, where the long-term outlook remains uncertain, overdraft protection has become an important feature for a growing number of checking customers.

Make an effort to realize its potential.

WHAT THE RESEARCH IS TELLING US

We were wrong about what we thought we knew about our customers who overdraw their checking accounts.

Too much of what we thought we knew is based on a combination of anecdotal information, obsolete studies, hunches, and beliefs passed down from older marketers to today's younger marketers. 

Perhaps most shocking – the percentage of customers overdrawing their checking accounts is up 146% over the level reported by an earlier FDIC study.

Originally pegged at 15% by the FDIC, the recently completed, nationwide study by ACTON Market Intelligence puts this number at a whopping 37%.

This statistic alone means your opt-in challenge is much greater than you originally thought it would be.

The emerging profile of your typical overdraft customer should also shock you.

It's no longer the struggling, low-balance customer living paycheck to paycheck. Or the self-employed caterer or other small business person with an erratic cash flow.

Meet today's more typical overdraft customer. She's a 42 year old, white female, empty nester who tends to own her own home in the suburbs of the South Census Region and has an annual household income of $48,500.

This bit of intelligence should have a major impact on how you approach your checking customers about opting-in. It affects both the copy and the graphics.

Another extremely pertinent bit of feedback from these surveyed consumers is that direct mail is their number one choice for receiving their opt-in notice from their bank or credit union.  

These are just three of the many eye-opening, thought-provoking findings from ACTON Market Intelligence's recently released nationwide overdraft survey of U.S. adult heads of household.

In addition, by reading the study you'll discover valuable regional information about pricing your overdraft protection coverage including the optimal NSF fee customers prefer paying,

You can learn more about this study here.

It's the perfect resource guide that'll help you navigate the array of choices being offered to get you to your desired opt-in destination. 

THE FIVE SECRETS TO GETTING CUSTOMERS TO OPT-IN

Secret #1: Be wary of using your general media agency for opt-in. This is not a branding challenge. It's a direct response challenge that requires the expertise of experienced direct response agencies.

Getting people to respond positively to anything is a major challenge. Avoid the temptation of writing your own opt-in copy in-house to save money. And by all means, do not allow your compliance folks or staff lawyers to write the copy.

Success requires the assistance of experienced direct response copywriters and graphic designers with a long track record of success.

As mentioned above, our proprietary research points out that consumers' number one choice for receiving their opt-in request is direct mail. Direct mail continues to be the leading direct response channel.

It's unusual times like these when you need the expertise of direct response professionals to assist you in achieving your marketing goals – in this case, maximum opt-in from your checking customers with debit cards.

Secret #2: You must present your customers with a simplified overdraft protection program that is easy to explain and that is simple for them to understand. It must be perceived as a fair program that provides value at a reasonable price.

If you're not sure your current or revised overdraft protection options meet these criteria, solicit feedback both from some of your branch front-line employees and random customers visiting your branches.

It's tough to sell a product or service that is difficult to understand, regardless of the price.

Secret #3: In this situation, opt-in is not a one-step process. Success depends on executing a multi-step notification campaign that takes place over several weeks. Think of it as a funnel. It begins with a notification to all checking customers with subsequent contacts being directed at your heavy users of overdraft protection.  

Secret #4: Staff training throughout your bank or credit union is critical to achieving your opt-in goals. Much of your opt-in success will depend on face-to-face and voice-to-voice contact between your customers and your employees. Ultimate success or failure depends on this personal contact taking place in your branches and call center. Will your employees be prepared?

Secret #5: Spend the money to acquire primary or secondary opt-in research and devote the necessary time to carefully reviewing the information and applying it to your opt-in campaign. It's a small investment that's guaranteed to deliver huge returns.

Embarking on your opt-in journey without the appropriate research data would be like driving cross country in your car without a road map. Research gets you there faster, safer, more economically, and on time.

Remember the sage advice from the old American Express card commercials, "Don't leave home without it."

SIX STEPS TO MOVING FORWARD TODAY

Since all banks and credit unions are starring down the barrel of the opt-in gun, there are some important steps you should be taking to ensure you hit your target of maximum opt-in.

The first, most important, step is to avoid all the guesswork surrounding this issue. Buy one of the major primary research studies devoted to the topic of overdraft opt-in. Down the road you'll realize this was a very wise investment of a few marketing dollars.

Second, avoid going it alone. Choose an experienced marketing partner with a track record in direct response marketing. This should quickly eliminate your general media agency that claims expertise in direct response marketing. These folks are branding experts – not direct response experts. Make sure your marketing partner is well-versed in Reg E and the government's requirements for implementation.

Third, if it's not already so, simplify your overdraft protection service so it's easily understood by both your branch employees and your checking customers. Price it so it's perceived as a valuable service by your customers. And above all, explain it in detail on its own website landing page while providing a link on your checking account comparison page.

Fourth, find the most effective opt-in program available – preferably a turnkey program. Ensure your marketing partner is proposing a multi-step communication process that targets the relevant customers the appropriate number of times. Due to the complexity of an "opt-in" scenario, this is not an easy, one-step process. And remember, as stated above, the AMI research tells us that a majority of consumers prefer notification via regular mail.

Fifth, ensure you have a robust Reg E opt-in training program available for training every bank or credit union employee with special emphasis on your customer contact employees in the branches and call centers. Remember – a majority of opt-ins will come from direct customer contact either in person or over the phone to customer service. Make sure your marketing partner has such a training program available.

Sixth, have a dedicated response tracking process in place to ensure timely receipt and processing of opt-in responses. This helps ensure you don't continue contacting customers who've already opted-in while saving you precious marketing dollars. This is one of the most critical functions provided by experienced direct response agencies. It's something they do for every customer contact mailing. In addition, such a tracking process provides management with timely reports on the success of your opt-in campaign.

If you are already underway with your opt-in notification campaign plannning, stop and take a minute to see where you are on each of these six steps.

Remember, there are no shortcuts here. Your financial institution's checking customer opt-in campaign will be one of the most important marketing campaigns of your career. There's a lot at stake here including fee income and short- and long-term customer satisfaction.