HOUSTON — The latest attempt to reform overdraft protection programs is gaining traction due to political and economic pressures, potentially dealing a major blow to credit union fee income.
Overdraft privilege purveyor Strunk & Associates recently released a report criticizing an FDIC survey on the subject for failing to be impartial and claimed a number of legislators are taking elements of the report out of context to back their claims that major reforms to courtesy pay are necessary.
"Their line of thinking goes like this: Consumers don't want this and they didn't ask for it. So just automatically enrolling people in this program is outrageous and deceptive and misleading...people should opt-in if they want this," said Strunk CEO Sam Davis, who countered that claim by noting that only 20% of all consumers use overdraft protection and that the majority "understand how it works and they have no problem being automatically enrolled. The survey makes the conclusion that consumers understand the service, they like it and they're willing to pay for it."
Davis criticized the "cup of coffee" hypothetical, in which a consumer buys a small coffee with a debit card, overdraws from his account and triggers a number of fees instead of having his card declined, as an exception to the rule, suggesting overdraft protection is a great benefit to members when they are making critical payments such as utility bills, tuition and rent or the mortgage. "In those instances that it is important for them to have the transaction honored and pay a fee for it, than have it not honored and pay much more for it," Davis argued.
If the most recent bill, the third put forth by Rep. Carolyn Maloney (D-N.Y.), goes through it could be bad news for not only credit unions as fee income shrivels up further but also for members that rely on the service fairly regularly.
"It would shift those dollars back to the true predatory lenders. You can rant and rave all you like, but consumers are not likely to change their habits. What's going to happen is that the demand will not go away but they'll use other more expensive forms of financing," Davis said. "Going back to where we were before presumes that you can magically change member behavior; you'll deny all these transactions, they'll get it and they'll live within their means and you've done a good thing because you save members from themselves. That plays well, but it's nonsense."
Taking Care Of Members
That is, in fact, the case in Pensacola according to Gulf Winds FCU CEO Chris Rutledge, who said a number of his members use the overdraft protection instead of heading to payday lenders and check cashers. Changing regulations on courtesy pay or eliminating it all together would not only hurt fee income, but also his membership. "It's not just an impact to the bottom line, it's an impact on member service in a huge way," he said. "We do not take the order the checks are received and manipulate it to increase fee income. We don't do things to try and hurt our members, we just take care of them if they do draw into the negative."
Mississippi-based Gulf Coast Community FCU has offered overdraft protection since 2002 and the program has received very positive reviews according to EVP Debbie Pidek. "Our members appreciate the fact that having their checks paid through the program enables them to avoid the embarrassment and inconvenience of having a check returned on those occasions that they happen to write a bad check. Additionally, the member in this situation saves a great deal of expense: instead of paying our NSF fee in addition to a returned check fee from their retailer, the member pays only the overdraft protection fee," she said. "We believe that during these challenging financial times, when members are already struggling, limiting their ability to use optional services such as our overdraft program would penalize them even more,"
Scott Hansen, EVP at Harland Financial Solutions, has a more tranquil perspective, saying that consumers are generally aware of overdraft protection but can easily get confused as to the details of their financial institutions' policies and new regulations requiring greater clarity would likely do no harm. "In general there are so many facets to what institutions deploy in the realm of overdraft protection. It appears to the consumer to be a simple phenomenon when there are a lot of twists and turns behind the scenes," he said. "We know the complexity of some of the routines, so we know it is complex in a lot of cases and it's pretty evident that the consumer can get lost in the subtleties of these things. More clarity is probably good."
Changes in the priority pay principle could also reduce fee income, but CUs that get out in front of the issue and deliver a solid program with clearly explained benefits to members will see less hits to their revenue streams.
