With little effort these days, you can find countless articles regarding the demise of overdraft programs, with the objective to protect and create an equal playing field for consumers.
According to a handful of legislators and many in the media, overdraft programs are detrimental to consumers and need an overhaul. Programs with high fees, manipulative processing of overdraft transactions and confusing disclosures for consumers are just some of the abusive practices that have led many financial institutions to benefit from excessively high volumes of overdraft income. However, the Consumer Financial Protection Bureau (CFPB) is casting a very wide net across all financial institutions nationwide to publicly scrutinize overdraft programs and even going so far to suggest that they be radically modified or even eliminated. But removing overdraft programs will not eliminate the consumer’s need for this service.
With all this rhetoric, what is the right strategy for your credit union?
Change may be coming, but it’s not here yet! Congress, once again, has reintroduced the Overdraft Protection Act. Similar legislation was attempted in recent years, but it was never passed. This current legislation will unlikely pass at this time as well. As for the CFPB, they are the primary proponent for change (and potential elimination) of overdraft programs and fees. Their position is that financial institutions are relying too heavily on overdraft fees as a source of income at the expense of the consumer. A common misconception that is continually publicized is that consumers loathe overdraft programs. When in reality, many consumers count on the simplicity and ease of having and using an overdraft program to help manage their short-term liquidity challenges. In an article from the CFPB, the watchdog organization has committed to an initiative to reduce “exploitative junk fees” charged by banks and financial institutions. The CFPB is currently seeking public comment to better assess the direction and public opinion of the fate of overdraft programs.1
In addition to the CFPB, the National Credit Union Administration (NCUA) has also elevated their examination requirements of overdraft programs, and they are making these fee-based services a critical component of their 2022 mission of combatting financial exclusion.2 Their regulatory focus will most likely require credit unions to evaluate and analyze their own programs including the operations, structure of the overdraft program, compliance, fee income, member usage and abuse, as well as member communication and disclosures. Credit unions will have an added burden of justifying the service that so many consumers utilize.
Consider the member’s perspective. If you really delve into the overdraft conversation, you might be surprised by a few statistics resulting from various publications by Morning Consult, an award-winning decision intelligence company. Morning Consult has highlighted some interesting facts.6
About half (48%) say that overdraft fees are a fair charge.
Overdraft transactions that come from consumers who proactively “opted in” to debit card overdraft programs.9
One surprising similarity between overdrafters and the general population is their income levels: Those who overdraft are about as likely to report annual household income of more than $50,000 and slightly more likely to report annual household income of more than $100,000.7
Half of U.S. adults say they’ve overdrafted, with 19% saying they’ve done so in the last 12 months.
The answer is relatively simple: Give Consumers a Choice!
If the consumer doesn’t want overdraft coverage, they can opt-out of the overdraft program at any time. NCUA has included information on their website (www.ncua.gov) specifically addressing overdraft programs and NSF fees. One of the first points they highlight is that overdraft coverage is optional. Having overdraft protection is a personal choice, and a member can opt-out any time. The reality is the consumer has already been given an opportunity to choose. Since 2010, when Regulation E went into effect, financial institutions required an affirmative “opt-in” from the consumer to pay and charge for everyday debit card as well as ATM transactions. Remember, consumers need access to short-term liquidity to fill a void between paychecks or to cover an unexpected bill or expense.
Whether that buffer covers a $75 grocery bill or a $500 car repair bill, the ease and convenience of an overdraft program helps the member. And, like many services in modern day society, the ease and convenience come with a service fee. Just like Instacart and DoorDash.
Removing and dismantling overdraft programs will not eliminate the consumer’s need for this service. It simply limits their available options. Consumer choice is critical in the financial institution space, and those choices should include multiple alternatives such as a sweep from a savings account, a personal line of credit, a short-term small dollar loan as well as courtesy overdraft coverage.
Sources cited in this publication are identified below.
The credit union industry was founded on the philosophy of “People Helping People.”Credit unions offer an array of products and services to help their members, and courtesy overdraft coverage is just one of the options they should provide. The member can then determine what products and services meet their financial needs and they want to utilize.
Spend time evaluating and analyzing your current overdraft program, seek professional advice and then determine the best strategy to move forward. Your members consider the credit union to be a trusted financial partner. Don’t negate that trust by eliminating a service that so many value as a short-term, convenient financial safety net.
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