The Death of Overdraft and NSF Fees – But NOT Your Noninterest Income
Capital One announced earlier this month that it would be eliminating overdraft fees for its customers.
According to Banking Dive, “Capital One CEO Richard Fairbank told employees the bank’s decision to eliminate the fee is an "important mission moment" for the company and its customers.” And the CEO’s memo further stated the large bank – largest to make this announcement so far – is heading to zero fees.
With a nudge from Senator Elizabeth Warren, citing Capital One’s move in a tweet, JP Morgan Chase is extending the grace period on overdrafts and not charging if the account goes negative by less than $50, stating that should affect about 2 million customers.
“Mission moment.”
Zero fees.
Mega bank sounding very credit union-y.
Certainly, a handful credit union have also been moving in this direction.
Alpena-Alcona Area Credit Union
Ally Bank began this recent trend back in June. According to a recent report out of the Consumer Financial Protection Bureau, 92.9% of smaller banks and 60.9% of credit unions offer overdraft programs, making such programs less common at these institutions than among large banks. YAY credit unions!
The CFPB continued that overdraft and NSF fees were 13 to 19% lower at small banks and credit unions than at large banks, however, credit unions with an overdraft program earned $42.33 in annual overdraft revenue per account versus small banks’ $40.37, just 6% and 11% less than large banks, respectively. So those credit unions offering overdraft are pretty hooked.
The CFPB has pledged to dig deeper into the issue, prompting strategic financial institutions to get ahead of the regulators. No, most credit unions aren’t directly overseen by the CFPB, but the NCUA will move with their federal brethren on this matter. Even the OCC chief, Michael Hsu, is getting in on defining ‘responsible overdraft programs.’ First, because of the Democratic administration, and second, credit unions cannot and should not be seen as less consumer friendly than the ‘evil, greedy’ bankers. In fact, the CFPB estimated credit unions (which aren’t required to report overdrafts and NSF fee revenue separately – yet, so it’s difficult to determine the accuracy) earned double the overdraft and NSF fees in 2019 that banks with less than $1 billion in assets earned. In addition, the annual NSF revenue per account was reported was $17.05 for credit unions with an overdraft program and $9.73 for banks with an overdraft program, compared to $13.27 at the large study banks. Read the full CFPB study on smaller banks and credit unions here.
That’s a double-edged sword, because to prove the data wrong, credit unions would have to change their reporting, which always comes at headaches and expenses. That said, credit unions may have to anyway.
No one wants to face the wrath of the regulators. The CFPB in recent years has ordered TD Bank to pay $122 million in penalties and customer restitution and ordered TCF Bank to pay $30 million in penalties and restitution.
The Value of Overdraft Protection
Overdraft protection serves a valuable purpose for both consumers and financial institutions. The consumer gets their payment covered despite not having the funds, and the financial institution earns a fee for providing that service. Prudent limits per accountholder make sense. Offering financial coaching and budgeting assistance is logical. To keep some of these folks from turning to unscrupulous payday lenders, title lenders, buy-here, pay-here auto dealers and worse, we need to continue offering these programs in a reasonable manner relative to memberships and individual members. It’s the only way we can possibly get people and keep these people in the financial mainstream.
Yet, consumer advocates harshly criticize the fees, especially as a minority of overdraft users pay most of the fees – and they tend to be the most financially vulnerable. Congresswoman Carolyn Maloney (D-NY) has introduced legislation to significantly limit the number of fees per month and per year. The CFPB is obviously studying the issue and threatening to rain down greater scrutiny. On top of that, former CFPB Director Richard Cordray, whose regulatory philosophies credit unions were not particularly fond of, is one of the names being bandied around to be appointed to the Federal Reserve.
NCUA Chairman Todd Harper told the Defense Credit Union Council in August, "In my view, the overdraft fee practices of some federal credit unions are fundamentally detrimental to members and inconsistent with the definition of ‘federal credit union’ in the Federal Credit Union Act: ‘a cooperative association organized ... for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.’ Overdraft fee programs can make it harder for members to regain their financial footing, and households hit by persistent overdraft fees often have their checking accounts closed. This, together with Black and Hispanic consumers being disproportionately harmed by overdraft fees, leads to financial exclusion, not financial inclusion."
The agency currently has a proposed rule languishing on the docket that would eliminate the 45-day max for federal credit unions to allow members to resolve overdrafts, replacing it with “a requirement that the written policy must establish a specific time limit that is both reasonable and applicable to all members, for a member either to deposit funds or obtain an approved loan from the credit union to cover each overdraft.” Just a few credit unions and credit unions organizations commented in favor of the proposal; Self-Help and the Center for Responsible Lending opposed it. While NCUA Vice Chairman Kyle Hauptman and Board Member Rodney Hood, based on their previous stances, would outvote Chairman Harper, Harper also controls the agency agenda.
*MDDCCUA is seeking credit union input regarding its representation of credit unions on the issue before legislators and regulators during a Zoom call next week.
Revenue-Generating Solutions
Credit unions do not need overdraft fees. WHOA! I know. That’s what you’ve always done perhaps? Consumers had them, despite it covering their financial butts - maybe more than once.
And this maybe be heresy, but credit unions do not need to offer free checking exclusively.
Now, before you burn me at the stake, you have more options. Move beyond the fear of change and get on top of this. Credit unions are losing the hearts and minds of the consumers – and increasingly based on the latest American Customer Satisfaction Index. Want to look like a hero? Dump the fees, set parameters for no-cost overdrafts and instead offer something that might tip the scales and make both your credit union and your members happy.
Strategy Corps and GreenProfit Solutions both offer creative benefits for rewards/value-added checking. The increased interchange and monthly subscription service revenue – just like your members’ Netflix accounts they’re already accustomed to – can make up for the lost overdraft protection with thoughtful offers, like roadside assistance, cell phone insurance, identity theft protection and more. Members don’t value overdraft protection; it’s table stakes they take for granted. And they sure don’t appreciate fees, but they will see the value in being able to replace the omnipresent cracked smartphone screen. Give them value they can see.
