For most consumers, an overdraft or NSF fee feels like a penalty, even if the financial institution charging it has funded a transaction beyond the balance in the account. Consumers don’t really see it as a short-term loan, they see it as a bad mistake being made even worse. And for low-income consumers, an NSF event can trigger a cascade of problems.
For community financial institutions, NSF fees represent a significant source of non-interest income (NII). They are an ingrained source of revenue that is not easily replaced. The big question for community banks and credit unions is how they should balance their dependence on NII with the dislike that consumers feel towards NSF fees.
In this article, I’ll unpack this issue and examine strategies that community financial institutions (CFIs) are using in the real world to grow their NII in consumer-friendly ways.
The double threat to NSF income
No CFI relies solely on NSF fees, but any time that net-interest margin compresses, bank and credit union leaders look for ways to use NII to fill the gap... unless you’re Ally Bank, Capital One or a handful of other institutions who have found ways to eliminate NSF income and keep their revenue healthy.
This competitive threat puts CFIs in a difficult spot, especially when you consider the dim view that federal agencies have of overdraft practices.
The regulatory threat is real, but the competitive threat is greater and has an immediate effect on consumer sentiment. Many neobanks and institutions can eliminate NSF fees because their income is highly diversified — the lost income (or in some cases never included NSF in the first place) barely damages their bottom line. For most consumers, an overdraft or NSF fee feels like a penalty, even if the financial institution charging it has funded a transaction beyond the balance in the account. Consumers don’t really see it as a short-term loan, they see it as a bad mistake being made even worse. And for low-income consumers, an NSF event can trigger a cascade of problems.
For community financial institutions, NSF fees represent a significant source of non-interest income (NII). They are an ingrained source of revenue that is not easily replaced. The big question for community banks and credit unions is how they should balance their dependence on NII with the dislike that consumers feel towards NSF fees.
In this article, I’ll unpack this issue and examine strategies that community financial institutions (CFIs) are using in the real world to grow their NII in consumer-friendly ways.
