FDIC Panel Considers Mobile Financial Services For Underbanked
How can financial institutions better serve underbanked individuals?
An advisory panel convened by the Federal Deposit Insurance Corporation (FDIC) met recently to discuss possible answers to this question. Particularly in light of recent regulatory efforts to shut down products like payday loans, the options for the underbanked appear to be decreasing, noted the Advisory Committee on Economic Inclusion.
One possible solution: mobile financial services (MFS).
At the meeting the FDIC released a report concluding that “MFS is best positioned to have an economic inclusion impact through its ability to meet day-to-day financial services needs of underbanked consumers as well as consumers at risk of account closure,” at least on a short-term basis.
MFS can also help “the underserved gain access to the banking system and grow their financial capability,” according to the “Assessing the Economic Inclusion Potential of Mobile Financial Services” report, as 90 percent of underbanked adults own a cell phone and 71 percent of those are smartphones.
To encourage underbanked customers, banks should integrate MFS into their broader economic inclusion strategies, the FDIC recommended, and integrate mobile with other delivery channels. Risk management should be updated to recognize MFS expansion and an increase in underbanked clientele, the agency added. The service itself should be enhanced with regard to speed, convenience, and mobile functionalities.
Banks should identify opportunities to enable more mobile functionalities, the FDIC said. For example, most bank customers must first enroll in the institution’s online banking service before they can enroll in mobile banking. “These requirements could be obstacles to MFS use for those who rely on a mobile phone to access the Internet,” the report noted.
Finally, banks should strive to bridge MFS with traditional payment services such as cash and checks. “Many underbanked consumers must make certain payments (e.g., rent payments) using paper instruments such as checks or money orders and some rely on cash exclusively for most or all of their payment needs,” the report stated. “MFS is likely to be a more useful financial tool for the underserved if ways can be found to reconcile and meet the underserved’s needs for electronic transactions with their need for paper payments or cash.”
But MFS is not a magic bullet as some panel members shared concern about the cost to banks to provide new services and features, especially for smaller financial institutions. “It becomes a point where community banking may not be as competitive with the larger banks,” cautioned panel member Alden McDonald, chief executive of Liberty Bank and Trust Co. in New Orleans.
Why it matters: “Mobile financial services is becoming more and more widespread but for a variety of reasons it’s not always designed for or used in ways that are increasing economic inclusion,” senior consumer researcher for the FDIC Susan Burhouse told the panel. “We found through our research that there are many ways to fine tune MFS offerings to make them even more useful tools for the underserved.” While some members of the Advisory Committee expressed concern about the potential cost to banks to improve and expand MFS, the FDIC said the report was released not as official policy but will serve as a foundation for further discussion of the issue.
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Regional FDIC Office Releases Overdraft Fee Guidance
Earlier this month the Kansas City Regional Office of the Federal Deposit Insurance Corporation (FDIC) released updated guidance on overdraft fees.
The Regional Office noted that many changes have occurred in the industry since the 2005 guidance on overdraft programs issued by the Federal Financial Institutions Examination Council. For example, amendments to Regulations E and DD have caused a number of institutions to adopt or increase continuous (or extended) overdraft or negative balance fees. Depending on how a bank sets up its overdraft program, continuous overdraft fees may be charged every day the account is overdrawn or once every few days.
In its updated guidance the Regional Office warns that a bank’s disclosures and practices relating to continuous overdraft fees may run afoul of the Federal Trade Commission’s prohibition on unfair or deceptive trade practices.
For example, some banks assess continuous overdraft fees based on calendar days, but customers can cure the overdraft only on business days. Consequently, if a bank charges a continuous overdraft fee after three days, and an overdraft occurs on a Thursday, the third calendar day is Sunday, a non-processing day. If the bank were to charge the fee on a Friday, that effectively leaves the consumer with just one day to cure the overdraft, not three as promised.
“Such practices have been cited as unfair, in violation of Section 5 [of the Federal Trade Commission Act],” the FDIC said.
To avoid potential issues, banks should review their fees and ask the question, “As a customer, would I know enough about how the fee is assessed to prevent myself from incurring it, should I accidentally overdraw my account?”
The agency proposed other considerations, such as whether a fee is assessed before the decision to pay or return an item and disclosure of whether the assessment of a bank service charge may cause an extended negative balance fee to be assessed. In the latter situation, the Regional Office suggests that the bank inquire whether “the consumer [is] told that other fees can lead to a negative balance, which can lead to additional fees.”
The guidance also offered two best practices for banks. When providing notice of an overdraft via a real-time communication method such as e-mail or text message, the bank should “amend default messages to include when the continuous overdraft fee will be assessed,” the agency suggested. Also when determining how much time to provide between notice of an overdraft fee and the actual assessment, the Regional Office suggested that the bank “give the customer a reasonable time to cure the overdraft prior to assessing any fee.”
Disclosures – particularly about how the bank calculates when fees will be assessed and the number of days to cure an overdraft – should be reviewed for accuracy, and banks should consider testing to ensure that fees are being assessed as intended and are consistent with disclosures.
“If discrepancies are found between what the bank discloses and what fees are assessed, that bank management should consider issuing new disclosures and making voluntary restitution to customers,” the FDIC said. “A review of depositor accounts for potential restitution should be conducted back to the date when the customers were assessed fees in excess of what should have been charged. Correcting such issues, including making full restitution, will be considered by the FDIC in reviewing the bank’s disclosures and practices.”
To read the Kansas City Regional Office’s guidance, click here.
Why it matters: Banks would be well-advised to review the guidance and consider whether any of their disclosures and practices relating to overdraft programs could run afoul of the Section 5 prohibition on unfair and deceptive acts or practices.
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New IRA Rollover Interpretation Has Implications For Banks
In a new interpretation with implications for banks, the Internal Revenue Service (IRS) announced its intent to change course and limit rollovers from an Individual Retirement Account (IRA) to one rollover per year per person, as an aggregate limit.
Section 408(d) of the Internal Revenue Code requires that most distributions from individual retirement accounts be subject to taxation in the year of the distribution. Section 408(d)(3) creates an exception for rollovers made within 60 days after the distribution. But Section 408(d)(3)(B) provides that the rollover exception “. . . does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.” In other words, if the individual has rolled over another IRA distribution within the preceding year, then he or she cannot use the rollover exception and will therefore be taxed on the distribution.
Previously the relevant Treasury Regulation had taken the view that the statutory language would be applied on an IRA-by-IRA basis. This permitted multiple rollovers in a specific 12-month period as long as only one rollover was made from any particular IRA. An individual with, say, four IRAs was permitted to roll each into a new IRA over the course of the year, for example.
But in January the U.S. Tax Court took a stricter view of the statute in the case of A.L. Bobrow v. Commissioner, T.C. Memo. 2014-21, limiting the individual in that case to a single rollover per year. The Bobrow case involved a man who made multiple IRA-to-IRA rollovers in a single year. Although he argued his actions were permissible, the Tax Court disagreed.
“The plain language of Section 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer,” the Court said, and the statute speaks in general terms about “an” IRA. “Had Congress intended to allow individuals to take nontaxable distributions from multiple IRAs per year, we believe Section 408(d)(3)(B) would have been worded differently.”
Now the IRS has informed taxpayers in Announcement 2014-15 that it intends to follow the Tax Court’s interpretation.
“The IRS anticipates that it will follow the interpretation of Section 408(d)(3)(B) in Bobrow,” the agency said. A proposed regulation adopting the IRA-by-IRA position will be withdrawn, and the portion of Publication 590 that explains this subject will be rewritten, the IRS said, to reflect the aggregate application of the rule.
Recognizing the administrative challenges facing IRA trustees to accommodate the changes (like updating disclosure documents and rollover processing requirements), the IRS said it will not apply the Bobrow interpretation to distributions that occur before January 1, 2015.
To read the IRS announcement, click here.
To read the U.S. Tax Court decision in A.L. Bobrow v. Commissioner, click here.
Why it matters: For banks, the new interpretation of Section 408(d)(3)(B) places an additional administrative burden to confirm with customers that no other rollovers occurred during the preceding 12-month period in order to report correctly the taxability of funds. Updates to the relevant forms and training for bank employees interfacing with customers are also necessary to be in compliance with the January 1, 2015, effective date. It is important, as well, to distinguish between rollovers and direct transfers of IRA funds between the trustees and custodians. It remains the case that trustee-to-trustee transfers can be made without any limit and avoid taxation every time. Only a true rollover – where the individual receives the distribution and deposits it to the new IRA within 60 days – is subject to the one-per-year limit.
Banks should not adopt a wait-and-see approach pending a possible reversal of Bobrow on appeal, as the IRS stated in its announcement that “[r]egardless of the ultimate resolution of the Bobrow case, the Treasury Department and the IRS expect to issue a proposed regulation under Section 408 that would provide that the IRA rollover limitation applies on an aggregate basis.”
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