The process of managing a member's overdrawn share draft account has changed significantly over the past two decades. Much of this change has been fueled by technology advancements as well as best practices suggested by regulators.
In order to meet these compliance guidelines as well as provide better service to each member, many credit unions realize they need a different, more modern approach to overdraft management.
They need robust technology and the tools that will help them meet three key objectives of an updated, optimized overdraft service:
1. Automatically communicate with each member on an individual, personalized basis. Personalized communication at the individual level helps drive better service. Members appreciate a call or letter from your credit union that coincides with specific events. For instance, contact members after they experience a debit card transaction that was denied for reason of NSF in order to explain why it occurred and to educate them about overdraft options. Additionally, custom communications can help your credit union minimize expenses. For example, if we know that Jack is overdrawn 10 days but he has been making deposits, why spend money sending him the standard 10-day overdraft letter that is typical of outdated systems? Why not wait until the 14th or 15th day to send the letter if Jack's account is not cured? A personalized communications strategy enhances member relations, maximizes collections, reduces costs and helps manage risk.
2. Regularly monitor your member's ability to repay as it pertains to overdrafts.
Monitoring your member's ability to repay is smart not only because it protects the institution and the member, it is what the regulators stress in their guidance.
As stated in the 2005 Joint Guidance on Overdraft Protection Programs: "Institutions should monitor these accounts on an ongoing basis and be able to identify consumers who may represent an undue credit risk to the institution. Overdraft protection programs should be administered and adjusted, as needed, to ensure that credit risk remains in line with expectations."
Until now, in almost all overdraft systems, accounts that qualified into the program retained the same fixed overdraft limit as granted on day one. But assigning the same overdraft limit to every member does not protect the institution from undue credit risk. It also does not adequately serve the member whose ability to repay would allow a higher limit nor the member who should have a reduced limit in order to avoid abuse of this short-term liquidity option.
3. Automatically establish individual overdraft limits and dynamically adjust these limits (up or down) based on member behavior. "Dynamic limits" in an overdraft service to help your credit union offer superior service, but also manage risk.
In a modern overdraft system, dynamic limits are calculated automatically based on multiple account data points, including specific deposit, age of relationship, related balances and more. With dynamic limits, your institution provides members with a personalized overdraft privilege service – one that pays more items for those members who appreciate and can afford the service, while pulling back on overdraft limits for those members whose ability to repay has diminished.
Additionally, dynamic limits allow your institution to better manage revenue loss and charge-off risk. Although it may seem counter-intuitive, accounts with the heaviest use of overdrafts also have the most deposit activity, both in the number of deposits and the amounts. They are, in fact, the least likely to be charged off.
Dynamic limits can also help your credit union save time making fewer pay/return decisions.
Thanks to advances in technology, it is now possible to better serve members with an overdraft service that not only meets compliance directives, but offers a personalized, consumer-focused approach.
Jeff Harper is President of BSG Financial Group. He can be reached at 502-581-1511 Ext. 250 or [email protected].
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