Traditional banks have made a lot of money in the past from overdraft fees. Banks and credit unions charge their customers overdraft protection fees every time the account balance goes below zero and the bank needs to honor a check or cover a payment made by the customer. The charges on overdraft fees are quite high, starting at $35 at several banks. Large banks reportedly charged consumers $34.3 billion in overdraft fees during 2017, compared to $33.3 billion in 2016.

These exorbitant overdraft fees create a certain distrust in the minds of consumers who feel that the banks do not have their best in interest at their heart.

It's of little surprise that consumers are now turning to challenger banks that offer zero overdraft fees up to a certain amount. This offers flexibility to consumers who need to bridge the gap for a short period of time. Despite letting go of a major revenue source, challenger banks have been able to double market share in just 2 years and are on the verge of breaking even.

The threat from challenger banks coupled with increased regulatory scrutiny is forcing financial institutions to re-think their revenue source from overdraft fees.

Banks and credit unions have to proactively cannibalize their revenues to ensure that they do not lose customers. The current estimated loss of revenue according to Accenture, represents between 6%-7% of total retail revenue of U.S. financial institutions and about 5% globally.

This image from The Financial Brand shows the Retail Banking Revenue that is at risk 

To meet this loss in revenue, financial institutions will have to look at alternate revenue sources. Banks will have to take on a more advisory role with trust-based banking, where they put the financial well being of the customer ahead and grow with them. Accenture estimates that trust-based banking can increase revenue upto 9% on average, more than making up for the estimated decrease in overdraft fee revenue.

Virtual assistants can help banks take on this advisory role with ease. Financial institutions have all the transactional data about their customers across multiple accounts. They can glean a lot of intelligence out of the data in real-time. The AI-enabled virtual assistant can read the data, process and understand patterns, and personalize the suggestions to help customers avoid overdraft fees and increase savings.

For example, the AI-enabled virtual assistant can suggest to a customer running low on funds in the following manner, “Hi Susan, your savings account has only $20 balance, and your monthly installment on the car is dues in another 7 days. Would you like to avail of a short term loan at 6% interest rate?”

This will bring about a fundamental change in the approach to banking that focuses on transparency. Instead of offering the overdraft facility that would cost the customer upwards of $35, she can avail of a short term loan at 6% thus saving her money that can be used to meet her savings goal. The virtual assistant was able to build trust with the customer and the customer views the bank as a financial adviser.

The suggestion made to the customer, Susan was personalized using her financial data. It creates financial literacy amongst the customers and teaches them how to create financial wellness for themselves. The self-service aspects along with the non-intrusive delivery mechanism make the customers comfortable enough to act on the suggestion.

The future of banking lies in building long-term relationships that is built on a foundation of trust. The trust factor will make the customer liable to stick with their primary bank rather than look for other choices, creating future-proof revenue streams.

Also Read: Financial Literacy in the Era of Virtual Assistants