Is your overdraft program a black box?

Last month, we explained that the right overdraft program should be simple and transparent, so that you can clearly understand the specific factors, trends and overrides that determine the overdraft limit. You should understand exactly what type of data is available to you, and you should be able to easily access that data to make informed decisions in the management of your overdraft program.  In addition, we challenged you to ask yourself some questions to determine whether your overdraft program is a black box.

A truly effective and transparent overdraft program should deliver countless features and functionality, and Part 1 of this article only just scratched the surface.  Is your overdraft program a black box? Ask yourself these additional questions:  

Does your pay ratio indicate your true service level?

Most financial institutions calculate their pay ratio with the simple formula: Number of items paid divided by total number of items.  So, if a consumer writes 10 checks, and the financial institution pays 8 of those, then the FI is satisfied that it has provided an 80% pay ratio to that account holder.  But what if that account holder had 10 debit card declines in that same period? In my experience, most financial institutions do not factor debit declines into their pay ratio, which results in a metric that does not truly reflect the level of service provided to that account holder because the debit declines reduce the effective pay ratio.

When a check is processed and sent to the FI, there is usually a system with which to approve it if the account holder does not have sufficient funds in his or her account.  Even if the FI does not have an overdraft software program in place, there is often the opportunity to review the check, make a judgment call and approve it with the appropriate NSF fee.  

But a debit card decline happens immediately.  Not only does this prevent the transaction from occurring, but it’s likely to create an embarrassing situation for the card holder if the debit decline occurs in a public retail setting. Whatever the reason for the decline, that card holder is going to be very unhappy! So, your institution has taken a double hit: you’ve lost revenue from a debit transaction (both overdraft as well as interchange income), and you’ve delivered poor service to your valuable customer or member.  

The right overdraft program will provide true pay ratios that factor in the debit declines, providing a more realistic picture of your service level.  This information allows you to proactively manage your service levels, while retaining debit transaction revenue.

Do you know the risk level of each account’s mobile deposits?

With every consumer deposit comes a certain level of risk. FIs assume a level of risk by giving account holders access to a portion of their deposited funds before they can confirm that the check has cleared.  But mobile deposits are inherently more risky, due to the greater potential for fraud in this channel.

Does your overdraft program provide a mobile deposit risk ratio? It should.  Based on an account’s past behavior, deposit patterns, etc., your system should provide you with a level of mobile deposit risk – similar to how overdraft limits are calculated.  That mobile deposit risk score will provide your FI with a more secure method for determining what percentage of the funds you should release, and when you should release them.

Does your program allow for customizable criteria to initiate communication with the account holder?

When patterns of account behavior change, indicating an increase in the risk level for that account, an effective overdraft program will flag that behavior change and automatically initiate a response based on your criteria. For instance, if an account holder regularly makes deposits 4 times per month, and suddenly that number of deposits reduces to 2, can your overdraft system identify that as a trigger event, and respond by queueing up a phone call, email or letter to that account holder?  

The right overdraft program will review every account, every day, for specific trigger events you’ve identified. The system will then queue up the appropriate response based on your customized input, resulting in a communication strategy that is efficient, timely, and provides excellent service to your account holders.

Without this feature, you staff would have to manually run reports and contact account holders directly. Further, you should always be prepared for the possibility that your examiners will require account holder communication for specific behavior changes.  Is your software configurable to send out custom communications at a moment’s notice?

Do you have the end-user capability to build and customize reports with any and all data in the system?

Are you able to identify all the various types of data stored in your software? Do you have the capability and the knowledge to create and run any type of custom report without needing your technical team to write queries? The #1, most critical feature of any overdraft program is the ability to easily build and customize reports using any data in the system, with an interface that is simple and intuitive enough for anybody in your institution to use. You should have the ability to save reports, and schedule them to run automatically or manually as needed.

If your program requires you to rely on a technical staff to write custom queries for basic reports, you’re wasting time and money. You cannot effectively manage an overdraft line of business if you don’t have quick and easy access to the information that facilitates intelligent and timely business decisions.

Can your software identify exactly where your charge offs are coming from?

Every financial institution wants to reduce the amount of charge offs on its general ledger. One of the obvious ways to reduce charge offs is to reduce overdraft limits. The problem with this approach is that when you reduce limits, you also reduce potential revenue and service to your account holders.  Your goal is to limit your charge offs while minimizing impact to your revenue and service levels. The right overdraft program will achieve this balance for you. Using the information in the software, the FI can analyze the key risk variables of your accounts and identify the accounts that have the highest probability of charge off   Armed with this knowledge, you can pinpoint the riskiest accounts with surgical precision and adjust limits accordingly.

The right overdraft program should be transparent, intuitive and simple to manage for all stakeholders.  It will give you the ability to make more informed business decisions, resulting in greater efficiencies, maximum service levels, and increased revenue.  

The right overdraft program – an effective overdraft program – will be illuminating.