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Courtesy Overdraft Programs are a service offered to consumers that allow them to avoid the embarrassment of denied transactions, or a way to access necessary funds in the event of an emergency situation. The scrutiny and actions of regulators, such as the Consumer Financial Protection Bureau (CFPB), however, suggest that Courtesy Overdraft Programs may be harmful for consumers. This discrepancy between financial institutions and regulators raises the question, how beneficial are Courtesy Overdraft Programs?

Overdraft Programs began as an ad hoc courtesy service for high value customers to avoid the cost and inconvenience associated with bounced checks. Today, automated Overdraft Programs allow for almost all consumers to be eligible for Overdraft Programs, thanks to the lower cost and risk associated with the automated programs. In 2010, the Federal Reserve Board amended Regulation E to prohibit financial institutions from assessing overdraft fees for ATM and one-time debit card transactions for consumers that had not opted-in to the program. This change to Regulation E eliminated one the biggest points of scrutiny surrounding Courtesy Overdraft Programs by regulators and consumers.

In 2016, the CFPB estimates that revenue from consumer overdraft and NSF fees totaled $17 billion, accounting for 65.4% of all consumer deposit fees paid. While Courtesy Overdraft Programs bring in a substantial amount of non-interest income, it more importantly provides consumers with a service that satisfies a key financial need. The CFPB also estimates that 30.00% of consumers overdraw their checking accounts in a given year, while only 8.00% of consumers overdraw more than 10 times in a given year. With almost a third of all consumers overdrawing their accounts annually, Courtesy Overdraft Programs prove to be a valued service that the majority of opted-in consumers utilize as a safety net.

The income that financial institutions bring in from Courtesy Overdraft Programs justify the program, even with the inherent risks that are associated with the program. However, the risk is mitigated because it is spread across a large number of accounts with small average overdraft balances. Part of the risk associated with Courtesy Overdraft Programs is the possibility of overdrawn accounts being closed, resulting in accounts being sent to collections or charged-off. Financial institutions offering Courtesy Overdraft Programs are also exposed to compliance risk. Courtesy Overdraft Programs compliance issues can result in fines from regulators and a negative reputation.

While Courtesy Overdraft Programs are not designed to be used as a source of credit, many consumers are choosing to knowingly overdraft rather than get a Payday loan. Payday loans are marketed as a product to help consumers cover any costs until their next paycheck arrives. The average loan term is 2 weeks and they have an average APR of over 300.00%. On October 5th, 2017 the Consumer Financial Protection Bureau finalized a rule targeting the payday debt traps that Payday loans create. The CFPB found that many consumers were having to pay expensive charges to refinance or rollover their Payday loans, creating a cycle of taking on new debt to pay off old debt. Financial institutions offering Courtesy Overdraft Programs provide consumers with a service that allows them to avoid this, while fulfilling the consumers short term credit needs.

In today’s rising rate environment, there’s an even larger importance placed on non-interest income for financial institutions. With the $17 billion overdraft market, and almost a third of all consumers utilizing the service, financial institutions who do not currently offer the service are missing out on both revenue and may not be adequately serving their customers/members. Automation has evolved Courtesy Overdraft Programs into a service with lower risk that provides more consumers with better service. Courtesy Overdraft Programs have proven to benefit both financial institutions and consumers will increase.

The Mad Banker