Introducing Overdraft Privilege

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Introducing Overdraft Privilege
Olympia LewisJenni McCarty
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Text Reference

• Kohn, Meir, Financial Institutions and Markets,
  pg. 204.
• Overdrafts this is a line of credit that is
  automatically drawn upon if there are
  insufficient funds in the customers deposit to
  cover a check.

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Background Information (1)

• Overdraft privilege was introduced in the mid
  1990s and marked a major shift in the banking
  industry. While overdraft lines of credit had
  long been offered to favored customers, these
  newer programs target customers living from
  paycheck to paycheck.

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Background Information (2)

• Overdraft fees are more expensive and restrictive
  than those charged to wealthy customers. While
  some programs charged a single flat fee of 18 to
  35 for each overdraft, the other banks impose
  daily fees until the account balance is out of
  the red. These fees can exceed what amounts to a
  1,000 percent loan on lines of credit of up to
  1,000. As such, overdrafts have become an
  attractive source of profit for banks and credit
  unions.

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What is overdraft privilege (ODP)?

• A member courtesy or privilege - to pay members
  NSF items, rather than returning their NSF items
  unpaid.
• Overdraft privilege does not constitute an actual
  or implied agreement between you and a
  bank/credit union, nor does it constitute an
  actual or implied obligation of or by a
  bank/credit union.
• This service represents a purely discretionary
  courtesy or privilege that a bank/credit union
  may provide to you from time to time, which may
  be withdrawn or withheld by them at any time
  without prior notice, reason or cause.

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How does it ODP work?

• Not Like Transfer from Savings or other
  checking account (TRF).
• Not Like Advance/Transfer From Line of Credit or
  Credit Card (LOC).
• Does not require a separate agreement with
  members. Existing member checking account
  agreement covers discretionary overdrafts.
• TRF/LOC Advance Funds to Checking Account to
  Prevent Negative Balance.
• Overdraft limits range from 500-1500.
• All most all existing checking accounts are
  assigned limits (as long as the account is in
  good standing).
• If members use ODP the Standard NSF Fee will
  range from 18-35 for each NSF item.

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Why Offer Overdraft Privilege?

• It is Better to Pay Members Overdrafts Than to
  Return Them Unpaid
• When a Members NSF Item is Returned Unpaid
• A bank/credit union charges NSF Fee of 20
• Retailer/Payee Charges Returned Item Fee of
  25-50
• (Wal-Mart Corporation Fee Averages 40 Per Item)
• Items are presented a 2nd time for additional
  fees 15-25
• TOTAL Charge to Member For Unpaid NSF Item
  65-100/Per Item

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How Is Overdraft Privilege Beneficial To Members?

• When that Same Item is Paid Into the Overdraft
• The bank/credit union charges the same fee of
  20
• No Retailer/Payee Fee 00
• No 2nd Presentment Fee 00
• TOTAL charge to Member for Paid NSF Item 20/Per
  Item
• This saves customers between 45 and 75 per
  item.

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Concerns About ODP

• Some consumer groups say more recent versions of
  this program encourage customers to overdrawn
  their checking accounts, generated millions of
  dollars.
• More than 2,000 banks/credit unions offer some
  variation of overdraft privilege.
• Many banks/credit unions also allow customers to
  overdrawn accounts with ATM and debit-card
  transactions.
• It is estimated that banks/credit unions can
  increase NSF income by 50 to 300 percent by
  offering this program. John M. Floyd Associates

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Regulations
Because there are some overdraft privilege
designs lacking in sufficient consumer protection
and appreciation for the regulatory environment,
regulators have become concerned with certain
practices. These concerns fall into four
categories 1) increased costs for account
holders, 2) encouraging account holders to
overspend and thus overdraft so the institution
can generate fee income, 3) misleading,
deceptive, or unfair practices, and 4) lack of
compliance with regulations. Balancing the needs
of account holders the financial, reputational,
and regulatory risks of financial institutions
and the concerns of regulators in designing an
Overdraft Privilege service is very complex.
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Banking in China Japan

• Checks in China, although widely used in the
  corporate world, have been long kept away from
  common consumers.
• Banks also appear hesitant to promote personal
  checks because of the higher risks in
  transactions resulting from the lack of personal
  credit systems throughout the country.
• Checks are not uncommon in Japan - for very large
  payments. Checking accounts are usually for large
  companies and very well off individuals. In
  everyday life, no one pays for anything by check.
  Some banks may not offer checking accounts to
  individuals and small companies.

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Source Information

• Strunk Associates Financial Institution
  Consulting Firm for Overdraft Privilege -
  www.strunklp.com
• ABC News A Costly Courtesy Overdraft
  Protection is an Expensive Privilegehttp//www.cs
  monitor.com/2003/0303/p15s01-wmpi.htm
• Japan Personal Banking www.japan.com/living/money
  /banks/card.php
• China.org.cn - Personal Checks to Flourish in
  Chinahttp//chinaonline.site.yahoo.net/credcarinc
  hi.html

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• Any Questions?

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Question 1

• There are no NSF fees associated with a checking
  account when Overdraft Privilege is
  used? TRUEFALSE

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Question 2

• There are regulations associated with a
  bank/credit union introducing Overdraft Privilege
  to their customers?
• TRUE
• FALSE