The time to change your overdraft policy was yesterday

My colleagues at Financial Health Network recently released research citing that amid government policy overhauls and renewed regulatory attention to overdraft and NSF fees, understanding when, how, and why members overdraft should inform further shifts in credit union practices and regulatory actions.

In 2022, banks and credit unions collected an estimated $9.9 billion in total overdraft/NSF fee revenue – a 6% decline from 2021. Although total overdraft/non-sufficient funds (NSF) revenue dropped year over year, the percentage of households that paid fees remained flat (17%).

Follow the lead of big banks

Over the past few years, many FIs, including the largest banks, have modified one or more overdraft/NSF-fee-related policy, such as reducing the size of the fee charged, lowering the cap on the maximum number of fees per day, instituting a grace period, or increasing the minimum negative balance amount to incur a fee.

Last year, Citibank stopped charging overdraft fees, returned item fees, and overdraft protection sweep fees altogether. Bank of America also eliminated NSF fees and drastically reduced overdraft fees from $35 to $10, driving down revenue from these services by over 90%.

Almost half (45%) of overdrafters reported that their most recent overdraft occurred on a transaction of $50 or less. In this case, for customers of Chase, a fee may not occur considering customers have a negative balance buffer of $50!

Not all “members value this service”

Overdrafts are often the result of a simple oversight or miscalculation. However, frequent overdrafters are more likely to intentionally overdraft; not because they want to incur a significant fee, but because they have few options.

Half (50%) of those who overdrafted reported that their most recent overdraft was unintentional. “Oops, sorry, it won’t happen again.” They come into your branch or contact your call center and get the fee reversed. 28% reported that their most recent overdraft was effectively a gamble, where they knew their balance was low, but thought there was a chance it could cover the purchase. But for many members, overdrafting may be their only option in a pinch, and yes it’s true, they’d rather have the transaction go through than be declined. That should not stop you from innovation. Balancing access to liquidity with fair and proportionate pricing and structure is the key.

Generate revenue and greater loyalty with high-quality financial health solutions

Recent data from Financial Health Network suggests dramatically different realities for how consumers interact with overdraft based on their financial health. Many face a persistent and chronic need for liquidity, but have limited access to affordable credit while juggling payments and income.

Financial health comes about when your daily systems help you build resilience and pursue opportunities. And your members are looking to you, their credit union, to help them along their financial health journey. An overwhelming majority of consumers want your help to improve their financial health…but few believe you’re delivering here.

Overdrafters = Unhappily Banked

Members who overdraft regularly are one offer away from leaving your credit union. High-cost overdraft policies are detrimental to peoples’ financial health. Helping improve financial health is just good business. Members who believe their credit union is supporting them along the financial health journey have greater levels of satisfaction, loyalty, and are 5x more likely to purchase additional products.

A credit union policy shift might also help

Timing matters. Hold times or funds availability – the time between when a deposit is made and when funds become available – can force cash-strapped members to rely on guesswork. Many overdrafts occur soon before an account receives a paycheck. Members can easily miscalculate how much money they actually have available before making a transaction.

A shift in your credit union’s funds availability policy might help members

Credit union leaders often say they know their members and their credit unions provide exceptional service. If that’s the case, what is stopping you from increasing the immediate funds availability policy? Do your cash-strapped members need more of their deposit than you’re immediately providing? Probably.

You are in the business of financial health

As financial industry leaders and policymakers consider the future of overdraft, inaction is your action. Credit union leaders need to signal to their membership they are in the business of improving their financial health, by offering high-quality solutions that align to members’ needs. A revised overdraft policy is the lowest hanging fruit and should be considered with:

• Policies that allow consumers to overdraft up to $50 without incurring fees could significantly lower fee burdens on consumers, given the prevalence of fees resulting from transactions of $50 or less;
• Twenty-four hour grace periods before overdraft fees are assessed, coupled with faster payment systems, may help some of those whose overdrafts are gambles, a disproportionate share of whom are very frequent overdrafters; and
• The elimination of NSF fees to ensure that those who are struggling the most will not also incur heavy fees.

The cost of overdraft should not be widely disproportionate to the value members are receiving. No one said this would be easy. Start by learning more. When you’re ready, we’re here to help. You can do this.