Banking Law

According to an article in yesterday's American Banker (paid subscription required), both banks and consumer advocates are stunned  (STUNNED I Tell Ya'!) that as banks have been forced to make consumers "opt in" to overdraft protection (as opposed to just automatically signing them up unless they affirmatively "opt out"), it appears that most consumers are choosing to participate in the much-maligned protection. Banks have been fearful, and consumer advocates jubilant, at the prospect that consumers would likely refuse to opt-in, thereby saving themselves (and costing the banks) BILLIONS and BILLIONS of dollars in overdraft fee income.

This may mean that banks have been winning (and consumer advocates losing) the marketing war for the soul of consumers. I guess we'll have to give the devil her due.

The final results are not in yet, but anecdotal reports and data suggest that the expected declines in overdraft business will probably be shallow.

If the final numbers bear out this initial impression, banks can breathe a sigh of relief and keep doing exactly what they did before. They might also take the opportunity to figure out how industry and consumer advocates alike underestimated customer demand for overdraft.

"The American consumer wants overdraft service," said Mike Moebs of Moebs Services, which just released one of the most detailed ? and, from banks' point of view, optimistic ? studies of overdraft trends to date. "We've had a hard time trying to convince people of that."

The Moebs data, gathered from a survey of almost 2,300 banks, say opt-in rates ranged from 60% to 80%, with nearly all frequent overdrafters ? that is, those with 10 overdrafts or more a year ? giving their consent.

[...]

Leslie Parrish, the senior researcher at the Center for Responsible Lending in Durham, N.C., noted that neutrally worded surveys by Nielsen Co. and other such firms found greater skepticism toward overdraft coverage than such high enrollment rates would imply.

"I'm a little bit surprised because it runs so counter to what consumers have stated their preferences are," she said. The discrepancy between such surveys and actual opt-in rates may therefore in part be the result of a very hard sell, she said.

While it may be the case that "good marketing" is the cause of this higher-than-expected opt-in trend, it may also be the case that consumers aren't as dumb and helpless as some on both sides of the fence assumed, and that, as I discussed last month, a number of them have intentionally used (and will continue to use) overdrafts as a form of short-term credit. It's expensive credit, but as the American Banker points out, it's a lot cheaper than a payday loan.

"The American consumer, seven times out of eight, if you ask them, will tell you that the overdraft service is not a penalty," Moebs said. "They view it as a service. And they're confused as to why over half the banks and credit unions out there view it as a penalty."

Of course, even if that contention is true, it's also true that banks that offer lower fees will get more business from such consumers. Moreover, even steady users of overdrafts will not "cotton" to the types of "high-to-low" posting that have generated so much bad press (and class-action litigation). Therefore, while this change forced upon banks by the Federal Reserve's changes to Regulation E might be a "marketing opportunity," that opportunity can be squandered by attempts to boost overdraft fee income through "sharp practices" that milk customers for excessive fees.