Key Considerations for Financial Institutions Regarding ODP/NSF in Light of New Regulations
August 7, 2024
 |
4 minute read – Pressure on non-interest income continues to grow, particularly on Overdraft Protection (ODP) and Non-Sufficient Funds (NSF). In 2022, many financial institutions revamped their ODP and NSF programs. Some did this to get out in front of potential regulatory pressure and take advantage of a market opportunity. Many others followed suit because of competitive pressure.
Fast forward to today and the Consumer Financial Protection Bureau has been actively looking to tackle “junk fees”. What has created additional pressure is that, for the first time, NCUA has required federally insured credit unions with assets over $1 billion to report their ODP and NSF income on the call report.
While banks over $1 billion have also had to report, the addition of credit union data creates more awareness in general around ODP/NSF. As a result, there are several considerations all financial institutions should think through:
Understand the information that is available in the call report. Think through the different ways the data can be collated and visualized. For example, the average ODP/NSF per member/customer can be calculated as can the percentage of net income that comes from ODP/NSF. On the former example, the pace of indirect lending can impact that number and tell different stories because indirect customers are less likely to have checking accounts.
Crucially, financial institutions should identify what data is not available in the call report. Examples here are checking penetration and transaction volume, two items that can influence ODP/NSF usage as can the demographic makeup of the membership/customership. Additionally, call report information does not show how often or how active institutions are at closing accounts. This can influence the ODP/NSF per account and per member/customer.
Next, understand your data. The data on the call report is a start. Financial institutions should dig into their data to understand usage at a more detailed level.
Doing this analysis has a twofold benefit. First, it can help financial institutions continue to evaluate their programs and make decisions about how they want to move forward.
Many have already lowered fees and changed the structure of when ODP is applied. At the same time, they have also made efforts to significantly reduce NSF, viewing this fee as not really providing a service whereas ODP does.
Many financial institutions have also been proactive in reaching out to customers to help them reduce their fees. The response is often “thanks, but no thanks” as that is how the customer wants to manage their money.
Regardless, financial institutions will likely need to continue thinking through ODP/NSF and making more changes. With that comes the pressure to also think through how to make up for that revenue.
The second benefit of doing this analysis is to help prepare messaging. With ODP/NSF information being public, there will come a time when consumers and the media will ask questions. As an example, Politico published a sharply worded article about California state-chartered credit unions after they were required to begin reporting this information starting in 2022. Regardless of whether ODP/NSF information is public, financial institutions should get ahead of the curve on their thinking and messaging as consumer awareness is likely to be higher. Financial institutions should also think about how they want to disseminate their messaging throughout the organization so employees are prepared with the right points and go-to people when questions are asked.
