Attention Bankers: 4 Steps to Follow in the Spirit of Ally’s Overdraft Fee Elimination
Ally, the largest digital bank in the U.S. and a division of Ally Financial Inc., recently made headlines by being the first bank to eliminate those dreaded overdraft fees. Typically, “gotcha” fees, like overdraft ones, are paid mainly by those who can least afford them. In Ally’s case, 95% of the consumers who paid $12.4 billion in overdraft fees in 2020 were “financially vulnerable” and disproportionately Black and Latinx, according to the 2021 FinHealth Spend Report. And, let’s not forget – those hated overdraft fees are among the most expensive and common checking account fines. It’s no secret that consumers can get hit several times in one day with those fees.
What Ally essentially did was put an end to a centuries-old banking process.
Bankers need to react, and this is a great time to do so.
Even when I was a CFPB board member, I made my position clear: the expectation of so-called ‘free checking’ can lead to a reliance on unsustainable ”gotcha” fees. Every commercial organization needs some transparent, mutually beneficial way to make money. A more sustainable option is for banks and credit unions to use new digital methods to lower account-specific costs while increasing non-interest revenue in a two-part strategy. So what should today’s bankers do next?
1. Develop a Mindset to Expand Your Footprint with Innovative, New Services Your Customers will Love
The first strategic step is to expand digital tools to get more consumers using the Financial Institution’s (FI’s) existing account protection tools that can reduce costs. FIs have generally already invested in 2FA, alerts, and card controls, yet they universally struggle with low adoption. These controls are necessary not just because of the non-stop data breaches (4 U.S. ones in a typical day), but also the increased risk of existing account fraud. Did you know that in a typical year, account fraud comprises about half of all U.S. identity fraud (which last year Javelin Strategy & Research pegged at $56B)?
If FIs could just get more consumers to use these existing controls, the cost of fraud and associated service fees would drop. So what’s holding consumers back from being more security-aware?
2. Go Beyond Generic Tools and Get Personal with Your Customers
The problem is that every single U.S. FI gives every consumer the same generic advice, rather than providing them with tailored recommendations based on their personal data breach history. Be honest: if your medical doctor gave you the exact same recommendations as every single other patient (for example, a prescription to penicillin or physical therapy on your left shoulder) you wouldn’t follow it either. What people want are personalized solutions. They want them to be tailored based on their risks alone and presented in a spirit of trust that leads to action. Artificial Intelligence (AI) makes such a solution available for the first time ever, in what we at Sontiq call BreachIQ™.
For the first time, FIs can lower costs by getting more consumers to adopt the controls that save them—and their customers—from potential expenses that follow ID fraud. They can do this by embedding personalized advice within their digital banking experience, that uses the consumers’ email address to find out where they’ve been breached, what unique ID crime risks are most elevated just for them based on their breach history, and finally, prescribe personalized action steps that best reduce their personal risk profile.
3. Drive Your Customers Back to Adopting Security Controls and Reduce Fraud
In the majority of cases, the risks FIs customers will see through BreachIQ will lead them back to adopting their FI’s existing account controls. Essentially, by taking the recommended actions, the FI’s customers will be able to help prevent ID fraud in their existing deposit or card fraud accounts before it even happens. This cuts costs, helping FIs to break their reliance on fee income from overdraft fees. Then as the consumer acts on more recommendations, they can opt for fee-based services that protect against fraud likely to occur at third-party organizations. This fraud could include new credit accounts opened outside their primary FI or identity misuse at government entities.
4. Be Transparent, Show Value, and End “Gotcha” Fees
For several breaches experienced by the customers, the prescribed BreachIQ action steps will include options that are best fulfilled with fee-based services. With consumers spending billions of dollars annually for identity protection, many bank customers are already paying out-of-pocket for services like credit monitoring or password managers. This is where bankers can profit by offering their customers superior products at a reduced cost—and for the first time ever with full integration to the FI’s own digital banking experience.
A few veterans will recall the CFPB fining a couple of the largest banks after their third-party partners applied marketing tactics that were ultimately deemed to be deceptive. Let’s be clear: what I’m proposing is intended to be entirely transparent and sustainable. I’m advocating for building on the provision of authentic new AI-driven methods that ultimately simplify the consumers’ choices, and drives a healthier financial state for both customer and FI.
This new capability should start with authentic recommendations that lower FI (and customer) costs by pointing them to existing free tools, while also offering optional services that reduce the customers’ cost outside the FI’s environment. As a result, the FI can experience lower costs with the potential for higher fee upside—and all in a relationship based on higher authenticity, trust, and sustainability.
If you’re looking for a way to wean yourself off “gotcha” banking fees, consider Sontiq’s four steps and the strategy proposed for lowering costs and raising revenue, all in closer digital partnerships with your customers. Bankers should take Ally’s announcement as a challenge that calls for considering new ways of increasing per-account profitability in both the top and bottom line.