Credit unions that haven't already embraced "overdraft privilege" need to overhaul the way they think of-and even what they call-this service, according to one expert.
"This is not protection, it's a privilege, and it works every place in every market," said Bill Strunk, chairman of the discretionary overdraft program provider Strunk & Associates. "Is bouncing that check good service?"
The unequivocal answer, Strunk told attendees of The Credit Union Journal's SEG & Business Development conference, is "no."
He said the numbers tell the story: the first returned check charge from a credit union is typically about $25, then the retailer submits the check again and when it's still NSF that's another $25, after which the retailer typically charges another $30 on top of that. By the time all is said and done, that one bounced check can cost a member anywhere from $50 to $80 or even more depending on any related late fees, interest or penalties that might apply-and that doesn't account for the lost time and embarrassment the member suffers. "How is that good service?" Strunk asked.
Instead, a credit union can extend what he calls discretionary overdraft privileges to its members and save those members a lot of time, money and embarrassment while generating valuable fee income, he suggested.
"Offer it to all your members, not just to some of them," advised Strunk, who sought to debunk what he said are some popular myths:
MYTH #1: Members who write NSFs are not responsible, are bad money managers, can't be trusted, are foolish and/or stupid.
"The market is not just the unbanked or undesirable, it's your members! Even some people who make a lot of money live paycheck to paycheck," Strunk related. "If the typical American homeowner missed two paychecks, they'd have to declare bankruptcy. In 2000 there were 400-million NSF items costing $40 billion in NSF fees. No amount of moralizing is going to make it go away: 15% to 25% of your members write NSF checks. Members who write NSFs are members who live paycheck-to-paycheck and represent 95% of the population regardless of income."
MYTH #2: NSF income is not important to a CU, and members who write NSFs are not "good" or "profitable" accounts.
In fact, Strunk suggested, NSF income represents at least 50% of the net income for many credit unions. An overdraft privilege program can easily be one of the most profitable services a credit union can offer, he said, noting that the fees a credit union charges for the program will still be well below what a member would end up paying on a bounced check.
MYTH #3: Members who are attracted to free checking are low-balance accounts, undesirable "low lifes," derelicts and winos.
The average collected balance in a client's free checking account is $1,272, Strunk said. "Who is attracted to free? Younger people are attracted to free checking, and they're also the ones who NSF because they have to live paycheck to paycheck," he observed. "You graduate from college and you need to buy that new suit to go on job interviews, but where's the money going to come from?"
Moreover, credit unions shouldn't discount the power of "free." "The two most powerful terms in advertising today are 'all you can eat' and 'free,'" Strunk pointed out.
MYTH #4: If the credit union offers free checking, service fee income is lost.
Not true, said Strunk, who noted that of his more than 800 clients none has seen a significant drop in service -charge income.
The key, he said, is to completely rethink the overdraft paradigm.
"You have to take NSF from punitive to privilege," Strunk observed. "We called it punitive pricing. We thought if we made it more expensive to bounce checks, that would drive the volume down, but it didn't. The beauty of a privilege is that it can be given and it can also be taken away."
Establishing the program so that it is noncontractual and at the discretion of the credit union-in other words, the credit union doesn't guarantee or promise to cover every check but rather agrees to consider paying overdrafts on a case-by-case basis-allows the credit union the leeway to revoke the NSF privilege whenever it deems fit.
"Treat these people with dignity and class," Strunk exhorted. "Give them a lollipop on Valentine's Day and a Turkey on Thanksgiving. Why not? They're the most profitable members you have."
For CUs who "don't believe" in overdraft coverage, Strunk suggested that offering such a program can be one way to help keep members out of the arms of payday lenders and pawn shops.
"Why do members use payday lenders? Because it's hassle free," he said. "Members want to know, 'why don't you trust me?' I'm telling you that you don't need a credit score to do this, you just need their paycheck."
Strunk related how one credit union promoted its overdraft program in its newsletter by touting that it had saved its members more than $800,000 in one month. "That's a great thing to be able to tell your members," Strunk said. "And they'll love you for it."
