Life After Reg E
LAKE BLUFF, Ill.-In the months leading up to the Aug. 15 deadline for new rules on overdraft protection programs, many had predicted credit unions needed to prepare for a dramatic dip in revenue. But one month later that is not proving to be the case.
In fact, credit unions and industry analysts now feel a sharp revenue decline may not occur, and that overdraft revenue will soon return to normal levels or may even increase.
Under the new changes to the Fed's Reg E, Electronic Funds Transfers Act, by July 1 credit unions and banks had to obtain permission, or opt-in, from new members and customers to provide them with automatic overdraft protection on all non-recurring debit card transactions and ATM withdrawals.
All financial institutions had until Aug. 15 to obtain opt-in for all of their existing members/customers.
With expectations for revenue losses prior to the deadline often as high as 50%, analysts estimated credit union overdraft revenue since mid-August is only down 10%. "Overall, this is nowhere near as bad as we thought," said Mike Moebs, economist and CEO of Moebs $ervices. "I am seeing roughly 5% to 15% loss of overdraft income."
Key To Success: Communication
A big reason for the limited losses, according to analysts, is that credit unions effectively handled communication of the Reg E change. "I think credit unions and community banks did a very good job with this within a very short period of time," stated Moebs, whose firm analyzed more than one-million credit union and bank checking accounts nationwide, including 1,100 credit unions.
"The community bank and credit union numbers were virtually the same. Of those people who overdraft at least once in a year, there are 9% to 11% who are frequent users and constitute 91% of the total overdraft revenue collected by credit unions. Credit unions got somewhere between 98% to 100% of this group to opt in. Overall consent came in at about 75% to 85%."
Sources also report good communication has limited the number of angry members calling the credit union when transactions are denied.
Moebs, and other analysts who spoke with Credit Union Journal, predict that overdraft revenue losses will diminish by year's end. Moebs believes overdraft revenue will increase-above pre-Aug. 15 levels-by early 2011, pushing credit union fee income to near record levels (see related story) next year. TDECU in Lake Jackson, Texas, is already reporting increased revenue (see related story).
Heather Kline, credit union product specialist for Velocity Solutions in Wilmington, N.C., acknowledged that credit unions had held "almost a Y2K mentality" about the Reg E deadline.
"There was a great deal of concern. But 95% of credit unions I have spoken with have seen very minimal impact to their revenue."
Experts attribute the low revenue loss totals to credit union preparedness-getting an early start educating members and using multiple channels to communicate and accept opt-in responses.
Credit unions that simply complied with the regulation and notified their members are feeling the greatest effects, sources agree.
"Overall, at credit unions that prepared well for the deadline, the biggest issue is they are taking a few calls from members who did not pay attention to the communication and are asking what happened when their transactions are declined," Kline explained. "So opt-ins are certainly continuing to happen."
One CU Projecting Revenue Growth
That has Bob Michaud, SVP-chief marketing officer at Mid Hudson Valley FCU in Kingston, N.Y., optimistic at the prospects for overdraft revenue increasing.
The $670-million credit union conducted a coordinated "Say yes to no-bounce" marketing campaign (Credit Union Journal, May 31) that resulted in 60% of core overdraft users opting in from a list of 5,000. The campaign convinced 5,000 members not on the list to choose the service, as well.
"We have seen a slight decline in overdraft revenue since Aug. 15," said Michaud. "We had 5,000 members using overdraft. Now, potentially, we have over 7,500."
The St. Petersburg, Fla.-based PSCU has been providing credit unions with opt-in support.
Sheila Fenton, director, TMC business development, shared that many credit unions are keeping opt-in channels open through the end of the year to capture new overdraft users and enroll those who failed to read the notices. Fenton said she is seeing some credit unions that have not been proactive with overdraft efforts feeling the revenue pinch.
"Those are the credit unions that are a bit more challenged now, and I think they are just starting to realize how this is impacting their bottom line," Fenton shared. "At this stage of the game they are trying to figure out what they can do to educate members and get the message out. I think there is a lot to be learned from credit unions that took the proactive approach, educated members, spun a good marketing campaign, and leveraged every access channel possible."