What Banks Should Know About Consumers’ Thoughts on Reg. E  

Lombard, Ill., May 2010 – As part of the Federal Reserve’s recent amendment to Regulation E, the Electronic Funds Transfer Act, consumers will be required to opt in for overdraft protection for debit and ATM transactions, beginning for new customers on July 1, 2010 and for existing customers on August 15, 2010.

A recent study by Raddon Financial Group (RFG) showed that only nine percent of bank customers contribute 80 percent of banks’ non-sufficient funds (NSF) fees. Depending on most banks’ specific fee strategy and pricing structure, financial institutions stand to lose between 40 and 60 percent of annual overdraft income from this new regulation. Since most overdraft activity is isolated to a small group of consumers, it is important to understand how this group views overdraft protection services offered by financial institutions.

Who is likely to opt in? A high percentage of customers with previous overdraft activity find value in overdraft protection.

Seventeen percent of all households report that they are either “extremely likely” or “very likely” to opt in for overdraft coverage for debit card purchases and ATM withdrawals, but ATM/debit cardholders with overdraft activity are almost twice as likely to opt in for coverage than other consumer segments. Twenty-nine percent of ATM/debit cardholders with overdraft activity on their accounts will likely opt in. Frequent users of overdraft protection, those with seven or more occurrences in a year, are most likely to opt in to continue receiving this service.

Who won’t opt in?

Fifty-one percent of households report that they will not opt in because they have no need for overdraft coverage, as they never overdraft their accounts. For this reason, a segmented approach to communication is vital. Financial institutions are likely to spend more of their communications dollars with those most likely to find value in the service. In addition, in order to mitigate the loss of fee income from this new regulation, some financial institutions are assessing their checking product menu to determine if free checking is still a viable product.

The value proposition: It’s a free service that only costs when you need it.

Many consumers indicate they will opt-in because overdraft protection is “free until you need it.” Of households extremely to somewhat likely to opt in for overdraft coverage for debit card purchases and ATM withdrawals, 53 percent indicate that they would opt in because they do not intend to overdraft and the service is free if they don’t use it. Forty-six percent said they would opt in because they want to guard against the potential of having a transaction declined. Additionally, “a need for emergency cash” and “too busy to make sure funds are available” were reasons consumers who use overdraft protection will opt in to continue to receive overdraft protection on one-time debit transactions.

About RFG
RFG, a strategic business unit of Open Solutions Inc., has been providing research-based solutions exclusively to the financial services industry since 1983. RFG understands the industry and knows how consumers and businesses interact with financial institutions. By combining our practical know-how with best practices in research and analysis, RFG helps financial institutions manage their customer relationships and their organizations.

For more information about Raddon Financial Group, contact Dan McGowan by email at dmcgowan@raddon.com or by phone at 800-827-3500. Visit Raddon Financial Group online at www.raddon.com.

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