By: Kari Anne Arnosk, Principal, Debit Consulting, Advisors Plus, PSCU 

Overdraft (OD) and non-sufficient funds (NSF) fees are once again coming under heavy scrutiny and criticism by the Consumer Financial Protection Bureau (CFPB), Congress and consumer advocates. While credit unions and banks with under $10 billion in assets are not directly regulated by the CFPB, their policies and actions may impact financial institutions of all sizes, and there will also be competitive pressure to make changes. In light of this, it is critical to start thinking about how your credit union can take proactive measures to address OD and NSF fees, stay competitive and, most importantly, put your members first. 

Background 
Overdraft scrutiny has been looming in the market for over a decade. Rep. Carolyn Maloney (D-NY) introduced the Overdraft Protection Act of 2021 on June 30, 2021, proposing to “crack down on predatory overdraft fees and establish fair and transparent practices for overdraft coverage programs.” Maloney has pursued a version of this legislation since 2009. 

On Dec. 1, 2021, the CFPB released a new study that showed overdraft and non-sufficient funds fees made up nearly two-thirds of reported fee revenue at banks, reaching an estimated $15.47 billion in 2019 – of which credit unions generated $2.39 billion, or 15.2%, of the total. For 2020, the same study reported total OD/NSF fees declined by $8.84 billion, or 26.2% (specific credit union data was not reported for this metric). CFPB research also indicated that 9% of consumer checking accounts (with 10 or more overdrafts per year) comprise 80% of the total overdraft revenue. These consumers are typically those struggling to stay financially afloat, living paycheck-to-paycheck, and have the greatest need for short-term cash solutions. 

As a result, the CFPB will examine the financial institutions they oversee that are heavily dependent on overdraft fees. The ultimate goal for this initiative is to ensure consumers are provided “fair, transparent and competitive” financial products and services. 

Financial Institutions are Taking Proactive Measures 
This OD/NSF scrutiny, coupled with competitive pressure and the effects of the pandemic accelerating the situation, has many financial institutions proactively implementing a broad range of strategies to help consumers manage their daily finances and avoid overdraft fees. These range from completely eliminating all OD and/or NSF fees to introducing alternatives to manage finances and help reduce overdraft occurrences and fees. 

The common theme for most of these changes is ensuring an accountholder-first strategy to enhance their experience and build long-term loyalty. Most financial institutions making changes are not looking to directly replace the potential lost OD/NSF fee revenue, instead relying on diversifying growth opportunities from other areas such as loans, mortgages, credit cards, investments and insurance. 

So, what can credit unions do to address OD/NSF fees, put members first and stay competitive in light of the looming scrutiny? 

Rethink Your OD/NSF Strategy 
While the CFPB does not directly oversee credit unions with under $10 billion in assets as previously mentioned, there certainly could be policy implications and competitive pressure to make changes. Credit unions should proactively review and understand their current situation as it pertains to OD/NSF fee income, policies and procedures and start planning for potential impacts to overdraft revenue. First, conduct an analysis of your credit union’s OD/NSF fees contribution to non-interest income.

• What percent of OD/NSF revenue comprises your total non-interest income?
   
• What percent of OD/NSF revenue comprises Courtesy Pay (for checks, ACH and recurring debit card transactions) and for one-time debit non-recurring debit card and ATM transactions where members must opt-in?
   
• What percentage of consumer checking accounts have 10 or more overdrafts per year?
   
• What percentage of overdraft revenue does this group of members comprise?
   
• What is the average dollar amount that a member overdraws their account?
   
• How many days is the average checking account overdrawn?

Once the overdraft analysis is completed, your credit union can begin to strategize and plan for flexible overdraft solutions or enhancements to existing programs to help your members. Some examples include:

• Overdraft Threshold: Provides members the ability to overdraw their account up to a certain amount (e.g., $50, $100, $200) without being charged an OD fee.
   
• Daily Cap: Caps the number of overdraft items charged per day (e.g., three per day) vs. no cap (where a member can be charged unlimited OD/NSF fees).
   
• Fee Schedule: Enhance your fee schedule by implementing Pew’s Model Disclosure Box for Checking Accounts to help members understand your overdraft fees, policies and procedures.
   
• 24-Hour Grace: If a member overdraws their account, they would have 24 hours to make a deposit before they are charged an overdraft fee. See Huntington National Bank’s example.
   
• BankOn: In addition to changing their overdraft programs, a growing number of banks and credit unions are joining “BankOn,” an initiative by the Cities for Financial Empowerment Fund (CFE) that offers certification to bank and credit union checking accounts that feature low costs and do not charge overdraft fees. There are more than 100 banks and credit unions certified.
   
• Early Direct Deposit: This is becoming a standard expectation for checking account holders. Multiple financial institutions (Capital One, Huntington Bank and, most recently, Chase) have introduced this benefit in 2021.
   
• Checkless Checking: Typically, a free checking account that does not offer checks and does not allow overdrafts. Accountholders are provided a debit card and have access to all mobile and online banking features.
   
• Website Enhancements: Ensure your website provides members detailed information regarding your overdraft programs (Overdraft Protection Solutions, Courtesy Pay, Debit Card Coverage, How Transactions Post, FAQs, etc.).
   
• Member Education: Leverage opportunities to educate members on managing their checking account to avoid OD fees. Provide continuous education via your website, video tutorials, direct mail, email, etc. regarding your digital solutions and tools available within your Mobile Banking app to help members actively manage their accounts.

Taking proactive measures to help your members manage their short-term cash needs without being penalized will not only help your credit union stay competitive, it will enhance your members’ experience and build long-term loyalty. 

Kari Anne Arnosk is a Principal Consultant with Advisors Plus with over 30 years of experience in the financial services industry. She works with clients to create the most effective strategies for maximizing their checking and debit card portfolio growth.