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August 18, 2010updated 04 Apr 2017 4:16pm

Increasing profits after Reg E

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.

By Victoria Conroy

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.


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.

Among 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.


Mobile banking: Overdraft fees paid in past 12 months, percentage of customers ‘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.

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