A new report from US payment consultancy Javelin looks
at how current and looming regulation is threatening banking
practices and existing fee revenue structures, making
customer-controlled bank offerings increasingly important. Offering
mobile services could be a major opportunity, as Victoria Conroy
reports.
Go deeper with GlobalData
Amid the waves of banking-related
regulation swamping US financial institutions, Regulation E is one
of the most troublesome. Regulation E (Reg E) is a regulatory
framework put in place in the US in 1978 to address electronic
funds transfers (EFTs), but changes due to be enacted this month
pose a raft of new questions to the industry.
The regulation is designed to
outline the rights and responsibilities of parties involved in
EFTs, to protect the integrity of the systems used for transferring
funds electronically, and also to provide a mechanism for reporting
errors with EFTs, unauthorised transactions, and fraud.
Under Reg E, consumers are entitled
to a number of protections, such as receiving documentation of
electronic transfers, including documentation on bank statements.
If they are required to receive payments electronically, they can
choose the financial institution such payments are sent to.
Consumers also cannot be required
to pay via EFT unless the payment is for an overdraft checking
account.
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By GlobalDataAmong the many issues financial
institutions face relating to Reg E are:
- How do banks and credit unions
revamp their business models to recoup lost fee revenue due to Reg
E? - How should financial institutions
position themselves to successfully overcome the challenges of
following current regulations? - Who is overdrafting, what do
overdraft violators look like, and how should they be
targeted? - What are other banks and credit
unions doing in response to new legislation? - How can mobile be used as a
solution for both the bank and the customer? - How will consumers’ lives change
post Reg E, and what are consumers’ options?
US payment consultancy Javelin
recommends financial institutions use the mobile channel by
developing alerts of value to consumers – alerts that are timely
(in real time), actionable (two way), and relevant (providing
information and solutions for a financial matter when it is
important to the customer).
In response to Reg E, banks and
credit unions must continue to be transparent about fees, educate
customers and members and give them the tools to effectively manage
their accounts.
The report is based on consumer
data that Javelin collected online from 5,211 respondents in March.
The survey targeted people based on representative proportions of
gender, age, income and ethnicity compared to the overall US online
population.
‘Serial’ overdrafters
generate most of fees
The Federal Deposit Insurance Corporation (FDIC) reported in
2008 that 14% of customers generated 93% of overdraft fees. Javelin
data in 2010 buttresses the FDIC findings: 81% of consumers have
never incurred an ATM overdraft fee, 72% have never incurred an
overdraft fee on a debit card transaction and 73% of consumers have
avoided cheque overdraft fees.
Approximately 34% of consumers
overdrew their accounts at least once in the past year. This is the
group Javelin refers to as “overdraft violators” or “overdrafters”
in the report. Serial overdrafters – consumers who overdraw their
accounts at least six times annually – are few in number but
generate the highest volume of overdraft fees. About 4% of
consumers had six or more overdrafts on ATM withdrawals and 5% had
at least six overdrafts on cheques.
Debit card transactions were the
most profitable overdraft source for financial institutions in
2009. While 72% of consumers never paid any fees for a debit card
overdraft, 6% paid overdraft fees three to five times, and 7% paid
at least six fees.
Overdraft fees on cheque will
remain a steady source of fee revenue. Approximately one-quarter of
all consumers paid at least one overdraft fee on a cheque; 13% paid
only one or two fees, and another 11% paid at least three fees.
Consumers were least likely to overdraw at the ATM: just 7% of all
consumers paid one or two fees, and 8% paid at least three
fees.
Mobile banking is a key means for
financial institutions to partner with customers and become their
ally.
Providing a mobile banking service
that allows access to financial data and accounts wherever and
whenever the consumer wants can help position the financial
institution as a ‘got-your-back’ service provider.
This is in stark contrast to
institutions that develop a persona of profiting by levying
‘gotcha’ fees when customers make financial errors.
Overdraft violators clearly need
and want mobile banking services, as demonstrated by their higher
usage than consumers overall (30% versus 17%) in the past 90 days.
Additionally, more than twice as many overdrafters as consumers
overall are using phones to transfer funds to another individual
(18% versus 8%).
Because younger consumers incur
more overdraft fees, the ratio of students to overdraft violators,
not surprisingly, is higher than average: 50% of overdraft
violators are students, versus 34% of all consumers.
Students not only are younger but
are still developing their financial habits, making it even more
important for financial institutions to give them actionable tools
to manage their accounts and help them avoid, manage or resolve
overdraft incidents.
Banks and credit unions that can lead their base of young
customers or members to develop active communication behaviours
through SMS text and email alerts will be better positioned to
satisfy this demographic segment and to successfully offer evolving
services, products and technologies.
