Stellar Financial Group Logo

Understanding the
Overdraft Fee Dilemma

As overdraft fee concerns increase throughout the banking industry and Congress, let’s take a look at how we got here. If we go back to the period in the early 2000s, a cottage industry began to provide and manage several institutions’ overdraft programs. Obviously, this service came with a cost. In fact, that cost became a huge windfall for those firms that were the early adopters. In short, a service that had always existed became a huge profit center for everyone involved. The only people that did not benefit were the consumers. This last point has been disputed by those who benefitted for the last 20-some years.


The concept of allowing a consumer to overdraw their account short-term to ensure payments are not allowed for other services (such as auto and mortgage payments) has merit. These carry high late fees and damage credit for consumers if returned by the bank or credit union. As is the case with many good ideas, a level of greed and quite frankly laziness slowly deteriorates the value of a good idea. This is exactly what has happened but does not have to be the case with overdraft fees. The escalation of fees charged to the consumer for each occurrence rose from the mid-teens at the turn of the century to an average fee today of roughly $35.00.

In short, as this fee became more of a profit center for many, the per occurrence fee continued to inch higher. That rise in fees as well as the structure of these programs has grown to the point that many institutions are reevaluating their policy related to overdraft. This is a result of consumers, regulators, and politicians pushing back on the situation.

The Overdraft Push-Back

The good news is many banks and credit unions have taken the initiative to address the issue on behalf of their customers. As is the case with many issues that impact consumers, the marketplace forces change. Having stated all of the above, let’s explore a simple solution to this issue. We make this recommendation based on working with over 500 banks and credit unions over the past 19 years to assist them in fully disclosing to their customers and members their overdraft policy. This disclosure of the policy related to the service is critical in our estimation and the foundation of a good overdraft program.

A Proactive Solution

Let’s go back for a second and discuss the fee institutions pay vendors to manage their programs. That fee which ranges from mid-teens to as high as 30% of the growth in fee income, basically allowed the institution to outsource the management of their program. So, why did a relatively small percentage of institutions, albeit the number probably exceeds 1,500, elect to do this? The answer is simple, there was a promise of exorbitant increases in fee income and the institutions could rely on technology to manage most of the process. Fortunately for consumers, a large percentage of the institutions elected to keep this core management function in-house.

An overdraft program can be easily managed with existing staff given the decline in branch traffic over the past 20 years. In addition, from a pure customer service and retention standpoint, this should be a person-to-person conversation when dealing with lack of funds. Not a situation where squeezing every last dollar out of a customer is the paramount goal.

So, what’s the final conclusion and solution to this ever-growing issue?

Overdraft fee income has declined significantly since its peak in 2019, as many consumers have been forced to better manage their finances due to the COVID-19 pandemic. Given that fact, why would an institution give away 15 to 30% of this increased revenue stream to a vendor for a service they can provide and manage internally. Here’s the simple solution, manage your program with existing staff, lower your per occurrence fee which history has proven may not reduce income significantly, and fully disclose to your customers and members the value and limits of the service you provide. This is a valuable service for your customer base, but remove the greed and laziness from the equation. The marketplace is requiring this of you as a banker and valued member of your community.

So, let’s be proactive, do the right thing for your customer, and satisfy the consumer, political and regulatory concerns that exist today.

Read More Articles From This Edition

Winter 2022 Edition of Stellar Insights

Welcome to the Winter 2022 Edition of Stellar Insights

As we kick off a new year, we have some very exciting news to share! The last two years have been a period of explosive growth for our company. As a result, we have invested heavily in technology and the expansion of the solutions we provide our clients. You may have noticed on the front cover of this edition of Stellar Insights, we have changed our name to The Stellar Financial Group


New Name, Same Stellar Company

Press Release: New Name, Same Stellar Company

Stellar Auto Loans kicks off the new year by officially becoming The Stellar Financial Group. With this new name change and growth, we will still hold true to our core principle and values. We will continue to provide our lending partners the same great service and results as they have come to know and experience with our organization…..


Couple Accepting an Auto Loan

Customer Acquisition | Requires an Offense and a Defense

Traditionally, customer or member acquisition was related to securing checking account customers. While that’s still a large component of customer acquisition strategies, it’s still only one of the proven strategies used to acquire new members. In this article, we will explore several components of a comprehensive customer growth strategy. We will also identify which of these strategies will serve as a defensive measure related to customer attrition….


Stellar Market Analysis Portal

The Stellar Market Analysis Portal is LIVE!

We are very excited to launch The Stellar Market Analysis Portal. This virtual marketing site allows potential clients the ability to browse our product solutions, pull auto refi counts applicable to their market, and literally explore the entire onboarding
process, at their leisure…..


Stellar Auto Loans Q&A

Stellar’s Auto Loan Recapture Program Q&A

What you need to know about the Stellar’s Auto Loan Recapture Program

Case Study Graphic

Case Study | $1B Asset Southwest Credit Union

This southwest credit union (CU) has an asset size of roughly $1.0B with 80,000 plus members. The CU has a community charter footprint with a potential
membership of over several million households. ….


Share via
Copy link
Powered by Social Snap