At some point in their lives, many consumers find themselves in the position of having made a transaction that causes their bank account balance to go below zero. When an overdraft occurs, the consumer usually faces fees related to their bank’s overdraft protection service. Those fees can add up quickly if the bank extends this service to customers that can’t afford to repay the overdraft in a timely manner.

It’s important that banks establish effective overdraft protection programs to protect both the consumer and the financial institution. Poor overdraft policies can drive away customers (or put them into deep overdraft debt), while banks risk losing money at a time when interest rates are declining –placing more focus on a bank’s ability to retain non-interest income and other revenue sources.

To understand how banks can build customer loyalty and drive revenue through overdraft protections, PaymentsJournal sat down with Jeffrey Burton, Director, Financial & Risk Management Solutions at Fiserv, and Brian Riley, director of Credit Advisory Services at Mercator Advisory Group.

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During the conversation, Burton and Riley identified the problems with the current overdraft landscape and sketched out how a consumer-centric overdraft policy can help banks during this declining interest rate environment.

Changes in the overdraft process since 2008

To gain perspective on current problems, Burton said you must understand how the industry got to where it is now. The overdraft process went through a significant amount of changes following the 2008 financial crisis. Regulations were put into place requiring customers to affirmatively consent to overdraft services for debit card transactions before a bank could charge the customer a fee related to an overdraft of the account.

“As a result of that type of change, as well as other changes that were made, bank revenue went down substantially after 2010,” explained Burton. Despite the decline in revenue, it was evident that the changes resulted in more consumer-friendly policies.

The major problems with current overdraft approaches

However, there is more work to be done to make overdraft services even better for consumers.

First, many smaller banks have largely adopted a “set it and forget it” approach to setting overdraft limits, said Burton. This means they give every customer the same overdraft limit irrespective of the customer’s ability to repay or historical behavior patt...