Have Overdrafts Made Banking Relationships Toxic?
By Joel Schwartz for Credit Union Business News
Banks and credit unions used to be the master of customer relationships, skillfully balancing empathy and integrity to know their customers well enough that they could proactively solve their financial problems. When my mom worked in banking, she knew all her customers by name and had a real sense of pride and satisfaction when she could help them, but as time went on, overdrafts often became a sore spot in her relationships.
Lack of communication puts a strain on any relationship, and today there is little to no proactive communication when customers face account shortages. When a customer is not informed of what’s happening, they lose trust in their financial institution and that frustration is understandable.
Of course, in today’s world much banking activity takes place online versus directly with a banker. Most customers view their relationship with their financial institution through their experience, both digital and in-person. And there’s a lot of room for improvement. In a Harris Poll survey conducted in January 2022, 55% of consumers indicated they feel “unseen” and “undervalued” by the brands they interact with, and that their experience with the brand rarely met their expectations (48%). Yet 92% of marketers surveyed thought they were keeping up with their customers’ expectations. It’s a great reminder that perception is not reality.
Making overdraft a more positive experience is an essential part of closing this perception gap and building back the trust between financial institutions and their customers. There are three tenets of a positive customer experience: know your customers, understand their behavior and needs, and reward them for their relationship with you. The reward piece is critical here—this is not the time and place for gimmicks or promotions. For example, if you announce that you are eliminating fees, you can’t include a footnote with requirements that exclude those that need the service the most. If you take the time to get to know someone, you should be more clued into their fundamental needs. For banking customers, that goes back to the main value proposition: they want you to tell them, in a timely manner, when they have a financial problem, and they want you to give them options to resolve it.
Apply that paradigm to today’s standard of overdrafts and NSF and you see why customers are frustrated. They don’t know when they face an account shortage, and they have no say in what gets paid or returned when it occurs. The bank decides for them, and they are charged a fee as a result. This leads customers to see overdraft as a penalty, and question why they weren’t in the loop on what’s happening in the first place. Especially since they could still face a ripple effect of negative consequences, such as late fees—and, if the issue persists over time, bad credit. There’s a big disconnect here, because the intent of overdraft services in particular is to help customers avoid such consequences. In reality, this lack of communication often exacerbates customers’ financial strain.
Instead, financial institutions should focus on helping customers use overdraft more proactively as a service—avoiding the feeling that it is being applied to them as a “penalty.” By increasing the amount of communication and giving customers options to rectify their account shortage before any additional fees or repercussions to their credit or reputation, we give them flexibility and control. Banks and credit unions are doing this today through DoubleCheck’s solution, which integrates directly into most core banking processors. This is a much clearer way to communicate to customers that their financial institution is there for them in their time of need.
Introducing flexibility and control into the overdraft process also enables financial institutions to fulfill their fundamental promise to customers: telling them when they have a problem—and helping them rectify it. This simple act alone can go a long way towards restoring a positive and healthy relationship between customers and their financial institution.
We probably won’t get back to the days when a bank employee, like my mom, knew all of her customers names—and vice versa. Still, there is an opportunity to draw on nostalgia from the “golden era” of banking by creating a new way for customers to connect to their financial institution and once again see them as a partner in helping them navigate their finances.
As we do this, it is important to remember that just because a customer interacts with their financial institution digitally vs. in-person doesn’t mean they don’t want a relationship with them. It’s just a different way to interact, one that is remarkably more convenient for most customers. Imagine my mom writing her customers off if they chose to use an ATM at the office instead of visiting her at her branch for a cash withdrawal!
The better approach is to appreciate your customers’ need for flexibility and control over their financial future via the method that’s most convenient for them. And that’s exactly what helping customers use overdraft more proactively as a service can do.
Joel Schwartz is the Founder & Co-Chief Executive Officer of DoubleCheck Solutions, a financial technology company with an innovative solution that delivers new revenue for Financial Institutions while giving customers and small businesses more transparency and control in the event of Non-Sufficient Funds (NSF).
Joel spent more than 20 years as a banking executive, serving as a Senior Vice President and Regional Manager at First Bank and a Branch and Cluster Manager for Downey Savings. For over a decade, Joel taught Niche Marketing and Market Share Growth at UCLA Extension. His experience enabled him to see the need for a company that empowers customers to make their own financial choices, build a great credit score and protect themselves from fraud. To meet this need, Joel founded DoubleCheck in Burbank, California in 2013. The company is now poised to help banks and credit unions rethink the industry’s outdated banking practices in the face of unprecedented economic, regulatory and legal challenges.