We often think of innovation as being primarily technology-driven – but there are some great examples of innovations in banking that were simply business model or process changes involving little, if any, new technology.
Two examples that have proven very valuable financially to US banks in recent years involve simply the handling of transactions being posted to a consumer’s checking account.
- The first innovation, now over fifteen years old, involves the bank simply sorting the items to be debited against the consumer’s checking account so that the largest value items get posted first. This simple process change has the effect of draining the account balance faster – thereby maximizing the number of other items that will potentially “bounce” – resulting in the most NSF fee income for the bank. This is like “found money”!
- The second innovation involves how the bank handles overdrafts resulting from debit card activity. When banks were considering debit card issuance over ten years ago, one of their biggest fears was that the use of debit cards might actually lower their revenues from NSF fees. Of course, that presumed that the bank actually wouldn’t authorize, in real-time, a debit card transaction if there wasn’t sufficient funds in the account – declining the transaction at the point-of-sale. Instead, some retail bankers figured out that they could actually risk-adjust authorizations and approve them if they were below some arbitrary threshold amount – and add on an NSF fee at the same time.
Both of these innovations, involving no new technology, have been responsible for billions of dollars of fee income for US banks. The Center for Responsible Lending estimated something like $18 billion in annual fees resulting from overdraft practices.
Naturally, these kinds of innovations sometime provoke consumer and regulatory responses – and both have predictably happened both in the US and the UK. In the US, the Federal Reserve has proposed changes that would require banks to modify their practices with respect to posting overdrafts to give the consumer more control over the behavior they’d like their bank to follow. That rulemaking proceeding is still open for public comment until Monday, March 30. Also, predictably, consumers are voicing their opinions about the practices in a large volume of comments publicly available on the Fed’s web site.