OD/NSF Fees: The False Safety Net of Doing Nothing

By Mike Branton

Given the proposed CFPB rules that are going into effect regarding OD/NSF fees, it’s the right  time to find out how banks and credit unions are dealing and planning to deal with this dominant source of non-interest income being increasingly scrutinized (yep, it’s classified as a “junk fee”) and regulated to generate less revenue.

We recently surveyed hundreds of bank and credit union leaders, targeting a relatively equal universe of FIs over and under $10 billion in assets. The response breakdown was 98 percent were financial institutions under $10 billion in assets (referred to as “community FIs” hereafter).




This is noteworthy because the proposed CFPB laws will initially affect just FIs above $10 billion in assets. Maybe those bankers were too busy to respond or maybe those bankers have accepted that their OD/NSF pricing and policies are going to be exactly what the CFPB says it’s going to be.

Nevertheless, it’s insightful to learn whether community FIs were being proactive in their approach to these regulatory changes or adopting a “wait and see” approach to these significant changes. Why? Because the fact is this CFPB regulation of OD/NSF fees and policies will quickly and ultimately apply to the entire banking industry as market forces created by this regulation will reach down to impact community FIs. 

We also wanted to explore if the anticipated impact on ODs/NSFs of retail accounts and small business (SMB) accounts differed or not.

Finally, we wanted to discover what current or future plans for fee income replacement revenue are, since those contingencies have to be discerned and justified before investment and rollout to customers/members.


Wait and See = Wait and Lose?

Given the uncertainty of any proposed CFPB regulatory action impacting overdrafts, it’s not surprising that many leaders of FIs below $10 billion in assets are taking a “wait and see” strategy. But, what is driving the intent behind this strategy is the next level inquiry.

Is it being patient to make a more informed decision? Is it displacement and denial because it only applies to larger FIs? Is it naivety that larger FIs won’t respond to this regulation by weaponizing it against smaller FIs to gain market share? Is it procrastination that this issue can be dealt with later (and maybe by someone else)? Is it fear of the material change in operations and products that the replacement revenue options will require?

Future of Overdrafts Graphic 6

Waiting and seeing is an active choice. However, in most situations it is the short-term or intermediate choice and seldom the final choice. That’s why the underlying intent of this choice is so important.


It’s About Making Informed Decisions

Bankers taking a wait and see approach to make a more informed decision is much different from denial, displacement, inexperience, laziness and fear. By informed decision, we mean being more ready when the next decision must be made. For example, gathering and analyzing pertinent information, tracking market dynamics, studying moves by competitors, seeking out and employing relevant expertise, and proactively modeling different scenarios for organizational impact. In other words, waiting and seeing is not doing nothing.

Future of Overdrafts Graphic 5

A particular area that’s concerning is smaller FIs tend to underestimate the impact to their customer/member base by the larger FIs. Many still have the illusion that their customer or member service is better than others or most consumers want to bank with a community FI or products don’t really matter. 

This isn’t aligned with the reality of the market share gains made at their expense by the bigger FIs (and now the digital banks) due to believing some or all of these illusions.




More specifically regarding overdrafts, if you don’t think your chronically or frequently overdrafting customers/members aren’t going to price shop overdrafts when your FI is charging $30 and other FIs are charging $3-$14 or that the $10 billion+ asset size FIs aren’t going to target market those same overdrafters with a message of why pay $30 for an overdraft when it only costs $3 here, you’re falling into a false safety net. 

Just study the past. These FIs have repeatedly weaponized whatever they can to differentiate themselves from smaller FIs. They have built analytical workshops with sleek digital banking products and operations and robust marketing to win at the cost of those FIs that don’t have these assets, namely community FIs.


And It’s about the 3 R's - Real Replacement Revenue 

Recognizing real replacement revenue strategies is restrictive but not difficult. Implementing replacement revenue strategies to realize relevant revenue is.

Given the results of the top 4 replacement revenue plans there needs to be a reality check on what can actually be realized to offset what will be a major revenue hit.

Here’s a taste of what we unearthed:  

  • Boost marketing. More marketing of undifferentiated or marginally differentiated products doesn’t guarantee new business. 
  • Boost reward plans for credit and debit cards. Here’s the real scoop on these business boosting strategies.

Effectively, everyone is treated to the same in terms of reward currency. The result of this (and we have seen this too many times), is the FI’s cost for the reward, be it points-based for redemption of some consideration or straight cash-back, is an investment in customers/members that are already costing the FI money. This would be okay if the revenue lift were enough to move a material number of these non-primary relationships to primary, but they don’t. Even when incremental cross-selling lift is projected to justify an acceptable financial return to invest in these programs, the elusiveness of the cross sale mitigates this projected contribution (the reasons why are too long to mention here) and these programs don’t validate.

Fututre of Overdrafts Survey 2024 Download
  • Increase checking account fees to increase service charge income. This acts more like a competitive brake, rather than an accelerator. Consistently at the top of reasons why consumers change FIs is because they thought fees were too high and/or unfair. 
  • Increase other miscellaneous fees. Raising fees with no commensurate value exchange for banking related services, even when blaming it on inflation, is a risky move due to its inherent consumer unfriendliness. 

Proceeding with any of these strategies is like swimming in the ocean when there are no lifeguards - do so at your own risk.



Need Help Making the Right Decision?

We don’t have all the answers and we’re not miracle workers, but for more than two decades we’ve helped 400+ community FIs:

  • Analyze the performance of every retail and small business relationship to determine who is primary (profitable) and who isn’t
  • Diversify from over-reliance on OD/NSF fees
  • Grow deposits organically without the risk and expense of acquisition efforts
  • Simplify unmanageable grandfathered and “zombie” accounts
  • Better engage with modern checking products to increase customer/member primacy


Learn more about us at www.strategycorps.com.

Mike Branton is a financial expert and partner at StrategyCorps. You can connect with him at mike.branton@strategycorps.com