How Banks Can Avoid Penalties and Embrace Customer-Centric Banking

Nov 14, 2024

Overdraft fees have traditionally been a reliable revenue source for many banks. However, regulators and consumers are now questioning their fairness.  The Consumer Financial Protection Bureau (CFPB)  recently took action against the Navy Federal Credit Union for charging nearly $1 billion in surprise overdraft fees. The CFPB’s enforcement sends a strong message to financial institutions: traditional fee structures – especially surprise overdraft fees – are under scrutiny. This crackdown presents financial institutions with a unique opportunity to innovate and adopt customer-centric practices.

A Wake-Up Call for Banks from the Navy Federal Credit Union Case

The CFPB’s $95 million enforcement action against Navy Federal Credit Union is the largest penalty ever imposed on a credit union. From 2017 to 2022, Navy Federal charged customers surprise fees on ATM withdrawals and debit card purchases, even when their accounts appeared to have sufficient funds at the time of the transactions. These fees were mainly a result of processing delays, which led to account deficits only after customers had already completed transactions – effectively blindsiding consumers with unexpected overdraft charges. For example,  consumers could check their account balance on Monday and see sufficient funds to make a purchase immediately.  However, the transaction would only be processed on Tuesday or Wednesday, when the funds were no longer available, causing the account to go into overdraft and resulting in surprise overdraft fees.

Another issue was the way the credit union handled incoming funds from peer-to-peer services like Zelle, PayPal, and Cash App. Although the deposits showed as “available” to spend in the customer’s account, payments received after specific cutoff times did not actually post until the next business day. As this practice was not transparent to the consumer, it often resulted in surprise overdraft fees.

The CFPB ordered Navy Federal to refund more than $80 million to consumers, stop their practice of charging illegal overdraft fees through their Optional Overdraft Protection Service (OOPS) program, and pay a $15 million penalty to the CFPB’s victims relief fund.

For banks, the takeaway is clear: regulatory bodies expect financial institutions to eliminate these fees or be held accountable for lack of transparency and consumer protection practices. Banks are fully expected to be proactive in preventing similar issues, and failing to comply with regulations can lead to significant financial penalties and damage to their reputation – such as in the Navy Federal Credit Union case.

Why Banks Should Rethink Their Overdraft Practices

Consumers today expect transparency. They’re increasingly frustrated when faced with surprise fees and prefer institutions that offer straightforward fee structures.  Banks that offer clear fees and empower customers with real-time information set themselves apart as trusted, customer-first organizations. Meeting these new consumer expectations head-on – even at the expense of lost revenue from fees — offers banks a unique opportunity to display ethical, transparent banking while building customer trust and loyalty.

But moving away from surprise fees doesn’t have to mean sacrificing profitability. Several revenue models prioritize customer satisfaction and meet regulatory standards, such as Kipp’s pioneering model.

How Financial Institutions Can Adapt and Look to the Future

Kipp’s platform enables real-time collaboration between card issuers and merchants, reducing declined transactions. With Kipp, banks can offset the expected revenue decline from overdraft fees by tapping into merchant-funded premiums. This innovative model lets merchants pay for additional transaction approvals, compensating issuers for this risk while meeting customers’ needs for seamless transactions. These merchant-funded premiums can accumulate, generating a new revenue stream for issuers in a competitive market.