As a community financial institution, you may be having some concerns about non-sufficient funds (NSF) activity these days. Well, those concerns would be absolutely legit. Aside from the possibility of them actually being legislated away, there’s also some very real pressure from other institutions to do away with NSF altogether in order to compete. For instance, on December 1, 2021, Capital One announced it will completely eliminate all overdraft fees and non-sufficient fund (NSF) fees for its consumer banking customers — but will continue to provide free overdraft protection.

Whoa…what? So, one of the largest banks in the country has just said they’re doing away with something that we’ve all been taught is a necessary evil of banking? If that isn’t throwing down the gauntlet to the competition, I don’t know what is. But that’s just part of the NSF story.

The numbers don’t paint a pretty picture, either.

Recent data is showing NSF to be a much less reliable source of non-interest income (NII) for banking institutions — especially in the long run. From 2019 to 2020, the median percentage of accounts with an NSF was far lower for the year as well as in a month-to-month comparison. From 2020 to 2021, January through March showed a lower percentage of accounts that had an NSF in a year-over-year comparison — although April through July did show strong improvement on a month-to-month comparison.

The reason for the decline is pretty obvious — stimulus checks and the corresponding increase in balances, as well as consumers being more conservative with their spending mid- and post-pandemic. The fact is, NSF isn’t the profit center it used to be. And it certainly can’t be counted on with its volatile nature.

One window closes. Another opens.

There is some good news in the numbers, though. It’s just a matter of shifting focus. Although NSF numbers saw a decline, point of sale (POS) numbers are definitely on the rise. Whereas transaction volumes had declined in 2020, this year has been much stronger, particularly since March. And since April, POS activity has increased dramatically. But, why?

Let’s call it a pandemic ripple effect. You see, credit card usage and lending declined as the pandemic set in and consumers held back. But there was still some level of spending that had to occur. That transaction volume appears to have found a home in debit card spending. Higher transaction volumes in debit card POS translates to more interchange per swipe and more interchange overall, thus creating another growing source of NII.

Comparing POS vs NSF by generation.

Age matters. Especially when it comes to these two categories. For instance, Gen X and Gen Z have the highest levels of POS transactions and total spend, with Gen Y having the third highest. And when it comes to NSF, Gen X and Gen Y represent 70% of NSF instances, but only 50% of accounts. And Gen Z’s contribution is growing while Boomer is declining.

The takeaway? Younger generations are more engaged from a transactional standpoint (NII), whereas older generations are falling away. So, the big question is: are you getting your share of new account openings from younger generations?

How to improve non-interest income and reduce reliance on NSF.

So, you definitely can’t rely on NSF. But it’s also not realistic to just drop it cold turkey. The ideal solution is to gradually reduce it while replacing that income. To do that, it’s important to remember that account balance and POS levels increase with time. Higher account balances lead to lower NSFs, and higher POS activity reduces reliance on NSF income.

In addition, accounts that have NSFs tend to have lower levels of direct deposit. So, the key is to incentivize and reward account holders that initiate ACH transactions and prioritize POS early in the relationship while ensuring that balances have time to grow. It just takes the right products, the right strategy, and a little patience.

Yes, the NSF story seems to be coming to an end. But with POS, there is an opportunity for NII — as well as a much better perception in the eyes of the consumer. But replacing the NSF income can’t be done through POS alone. It requires an ecosystem strategy that provides consumers with multiple ways to deepen their relationship with you and fulfill their financial needs — both in the lending arena and in non-interest income generating activities.

Your account holders will then see you as a partner, which can only lead to increased primary financial institution status — creating more engagement with your institution, more demand for your products, and more black numbers on your bottom line.