Thu, May 4, 2017
In a system using matrix-based, or “dynamic,” overdraft limits, Cinderella is left in the dark as to just how much she is able to overdraft. Will it be $200? $500? $1,000? It all depends on what the bank or credit union deems she can afford to pay back, and that amount can change frequently. A fairy Godmother would come in handy right about then, transforming Cinderella’s cloud of confusion into confident, financially-conscious decision making.
This is no fairy tale, though; overdraft limit variability can happen to anyone whose financial institution relies on this type of undisclosed program.
Dynamic … or Convoluted?
“Dynamic” sounds great, right? But that illusion starts turning to rags immediately, starting with the matrix data—it’s used to determine an account holder's ability to repay the overdraft, then limits are set accordingly. But for many, incomes and expenses don’t follow a smooth upward or downward slope; they spike up or down by the month or even the week. Relying on technology to pick up on these individual distinctions results in filling in information gaps with assumptions. Besides, any good lender will tell you that “ability to repay” is determined by much more than just checking account activity. Most importantly, a courtesy overdraft is a fee-based service and should never be confused with a “Truth in Lending" regulated loan.
Next, you leave them in a potential lurch when they overdraw their account. Either they do so knowingly, or they do so mistakenly. In the former situation, wouldn’t it be nice for your account holder to know upfront what their limit is, to ensure the transaction will be paid? In the latter situation, at least they will have already been informed upfront of this service, the associated fees, and the limits.
Finally, matrix-based overdraft programs are difficult to explain to account holders, and not easily understandable to them. Why was my limit higher in the past? Why is it lower than someone who makes less money than I do? What will my limit be next month, when I have to start making a car payment? Having someone try to explain how a computer system using account history, estimated deposit activity, average daily balances and spending habits is a recipe for distrust and dissatisfaction.
A Lesson in Bibbidy-Bobbity-Boo
At JMFA, the closest we can get to being fairy Godmothers is promoting transparency and building trust with your account holders. A magic wand won’t bring success; you have to put their best interests at the forefront. Providing an overdraft service with all the details upfront empowers account holders to make informed decisions and take fiscal responsibility. And far from a set-it-and-forget it strategy, fixed overdraft limits allow for a transparent overdraft solution to meet and exceed compliance expectations and more.
Having a well-communicated overdraft program is one of the best ways to deliver the highest level of service and instill trust in your account holders and members. Learn why in this video.