ARE OVERDRAFt
PROGRAMS REALLY

Over?

WHAT’S HAPPENING NOW WITH OVERDRAFT PROGRAMS?

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?

CFPB, NCUA REGULATORS & POTENTIAL LEGISLATION

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.

THE "BIG BANK" RESPONSE

Many of the big banks and a few credit unions have already eliminated or drastically reduced overdrafts and NSF (Non-Sufficient Fund) fees. But we need to look past the headlines, read the fine print and understand what these financial institutions are changing, and what it means for the consumer. Below are some practices from a few financial institutions that have already changed their overdraft programs.
  • No overdraft fee occurs if you make a deposit to cover the overdraft within 24 hours.3
    • In the meantime, debit card and ATM transactions are declined. If the deposit isn’t made within 24 hours, the item will inevitably be returned.
  • We will cover an overdraft balance up to $50 without any overdraft fees.4
    • But what happens to transactions that exceed the $50 negative balance? Those transactions will be declined and/or returned.
  • We no longer charge an NSF fee.5
    • NSF fees are typically charged when an item is returned. Of the combined overdraft/NSF fees, the NSF portion is approximately 20% of the total fees for overdrafts and NSFs. If the financial institution is returning an item, they have no risk involved in that transaction. But where does that leave the member?
  • We’ve eliminated all overdraft fees and returned-item fees.3
    • As most of us know, fee income is necessary and most likely will be recuperated elsewhere, perhaps by eliminating low-cost or free checking accounts or charging more for ATM transactions. Some financial institutions may increase the aggregate minimum balance requirements, and if those requirements aren’t met, account fees themselves may increase.

A few Statistics

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

48%

About half (48%) say that overdraft fees are a fair charge.

80%

Overdraft transactions that come from consumers who proactively “opted in” to debit card overdraft programs.9

$50k +

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

1/2

Half of U.S. adults say they’ve overdrafted, with 19% saying they’ve done so in the last 12 months.

One could conclude that these facts paint a different picture than what some regulators are claiming. Again, consumers use overdraft coverage as a service, and they understand that service comes with a fee. According to a study by Curinos (the leading provider of data, technologies and insights that enable financial institutions to make better, and more profitable, data-driven decisions faster), consumers do understand overdraft programs as well as available alternatives. More than 60% of overdrafts come from consumers who purposely intend to use the service as opposed to those who accidently overdraft an account. More than 80% of overdraft transactions come from consumers who proactively “opted in” to debit card overdraft programs with the clear intention of using it to cover their transaction payments. In addition, many reports hype the fact that consumers are paying significant fees for small dollar transactions. In reality, that’s not necessarily true. According to the Curinos study, the average size of purchases that trigger overdraft fees has nearly quadrupled from $50 to almost $200.8

WHERE DOES THAT LEAVE THE CONSUMER?​

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.

  • 1: https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-initiative-to-save-americans-billions-in-junk-fees/
  • 2: https://www.americanbanker.com/creditunions/news/ncua-plans-overdraft-scrutiny-with-a-close-eye-on-financial-inclusion
  • 3: https://cnet.com/personal-finance/banking/these-8-banks-have-eliminated-or-reduced-overdraft-fees/
  • 4: https://www.freep.com/story/money/personal-finance/susan-tompor/2021/12/08/chase-bank-overdraft-fees-assist/8886802002/
  • 5: https://businesswire.com/news/home/20210802005600/en/Alliant-Credit-Union-Eliminates-Overdraft-Fees
  • 6: https://morningconsult.com/2021/06/15/banks-overdraft-fees-pandemic/
  • 7: https://morningconsult.com/2022/01/11/overdrafted-underbanked-and-looking-for-new-providers/
  • 8: https://curinos.com/insights/lcrq421-competition-drives-overdraft-overhaul/

WHAT SHOULD YOUR CREDIT UNION DO?

We suggest that you consider the following questions to determine how best to position your credit union, while balancing your operational procedures with the short-term liquidity needs of your members.
  1. Should you eliminate or reduce your overdraft fees?
    • Analyze your statistical and demographic information to make this decision.
  2. How many members utilize your overdraft program, and what will dismantling the program do to them? 
    • Consider the usage and popularity of your program and decide if you can offer other alternatives to your members to solve their short-term liquidity needs.
  3. Are your disclosures, internal policies and procedures and marketing materials clear, concise and compliant?
    • Determine if your staff understands the program and can explain it to members.
  4. Are you prepared to defend your overdraft program to your regulators?
    • According to NCUA, future examinations will scrutinize overdraft programs in detail, including but not limited to, disclosures, member usage statistics, potential member abuse statistics, operational requirements, opt-in procedures, overdraft fees as a percentage of fee income and other program parameters.
  5. Have you considered talking to an expert?
    • At SmartStep Solutions, we partner with credit unions to customize their overdraft program. We want what’s best for the credit union and their members. We help credit unions start a program, as well as revitalize and fine-tune the program they already have in place. We’ll ensure that the credit union is offering a service that is guaranteed compliant and fair to the member, as well as easy for your staff to understand and explain to anyone who might be interested.

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.​