The Financial Brand Insights - Fall 2022

and institutions can eliminate NSF fees because their income is highly diversified — the lost income barely damages their bottom line. In some cases, they never had NSF income in the first place. Take Ally for instance: 2020 Data Est. median ROAA Est. median ROAA (if OD fees are eliminated) Change (%) *Only banks over $1 billion in assets have to report overdraft fees All Banks Reporting Overdraft Fees * Ally Bank 0.890% 0.836% –3.7% 1.10% 1.097% –0.26% The return on average assets for Ally after eliminating NSF fees fell by a quarter of 1% — think about that: It still rounds to the same number! If other institutions (banks holding more than $1 billion in assets) were to follow, their ROAA would fall by nearly 4%. When you’re watching neobanks and megabanks slash their NSF fees to ribbons, remember that they can afford it thanks to diverse income streams. Does this mean that NSF income might disappear for the entire industry? Unlikely. The future of NSF fees isn’t set in stone, but community banks need to plan ahead and examine alternatives. An Eye On The Future: Don’t assume that overdraft fees need to be eliminated completely, but start looking for substitutes to drive profitable behaviors. What Are the Viable Alternatives? One of the most common sources of NII is interchange, or the fee charged to retailers and merchants every time a consumer uses their debit or credit card.

By Patrick Dickson SVP, Chief Research Analyst and Executive Strategist at Kasasa

For most consumers, getting hit with an overdraft or nonsufficient funds (NSF) fee feels like a penalty, even though the bank charging it has funded a transaction beyond the balance in the account. Consumers don’t really see NSF fees as the price for a short-term loan; they see them as a fine that makes a bad mistake worse. And for low-income consumers, an NSF event can trigger a cascade of problems. For community banks, NSF fees represent a significant source of noninterest income (NII). They are an ingrained source of revenue that is not easily replaced. The big question is how they should balance their dependence on fee income against consumers’ annoyance with NSF fees. In this article, I’ll unpack this issue and examine strategies that community financial institutions are using in the real world to grow their NII in consumer-friendly ways. The Double Threat to NSF Income No bank relies solely on NSF fees, but any time net interest margin compresses, bank leaders look for ways to use NII to fill the gap… unless you’re Ally Bank, Capital One, or a handful of other large financial institutions that have found ways to eliminate NSF income and keep their revenue healthy. This competitive imbalance puts community banks in a difficult spot, especially considering the dim view that federal agencies have of overdraft practices. The regulatory threat is real, but the competitive threat is greater and has an immediate effect on consumer sentiment. Many neobanks

Is Your Bank’s Overdraft Strategy Letting You Down?





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