It is undeniable that the overdraft service environment has changed in the last two to three years. In order to minimize the impact of industry changes and recent market shifts, now is a great time for credit unions to take a step back and re-evaluate their current overall overdraft strategy. Following are three key areas that can impact the degree to which your program meets consumer needs, simplify your next exam and help to avoid the risk of potential litigation.
When consumers are aware of the fees associated with accessing liquidity to meet their household needs, they understand the value your overdraft program provides. Respondents in a study by McGuffin indicated that fees assessed in response to a customer’s action (or inaction), such as overdrawing an account, are fairer than fees for services, like ATM usage and mobile banking. In other words, consumers were more accepting of fees they could control. What’s more, simple and clear communication about fees reinforced respondents’ trust in their financial institution.
An evaluation of your current fee structure should be based on several variables. Is the fee reasonable, compared to the cost of the item not being paid? How does it compare with other institutions in your market? If you haven’t looked at your fee schedule in a few years, it’s important to determine if it is still a fit for your market and responsive to what account holders might be saying to your frontline staff about how it is impacting their situation.
Importantly, fee-based services should be offered to address an overdraft after lower-priced options—such as a transfer from a secondary account or line of credit have been used. The lowest-priced options should always precede the overdraft fee-based service.
Other issues to consider related to fees include the possibility of capping the number of overdraft items charged per day, setting an overdraft threshold—de minimis—amount where no fee is charged, or offering a grace period to allow account holders the chance to make things right, without charging them a fee. Additionally, offering a low-cost checking product without overdraft fees can give account holders another choice to meet their specific financial needs.
Responsible policies and procedures
Transparency and full disclosure have always been key elements of what regulators expect from a fully compliant overdraft program. Recent criticism of undisclosed solutions by Consumer Financial Protection Bureau (CFPB) Director Raj Chopra makes this truer now than ever before.
Interestingly, the same large national banks that have made headlines for lowering or eliminating overdraft/NSF fees have demonstrated a lack of transparency for how their overdraft program works, making it challenging for consumers to anticipate how their items may or may not be covered.
Having complete and correct processes in place—such as Reg E requirements and neutral posting order to protect account holders from multiple fees—along with easy-to-understand account disclosures is essential to preserving your account holder relationships and protecting your institution from increased regulatory scrutiny and potential legal risk.
Regulators demand that consumers are the focus of a compliant overdraft program. Full disclosure allows account holders to be knowledgeable about their options and maintain control over the fees they pay. A consumer-centric communications strategy with detailed information—available from branch locations, a call center, website, via mobile banking app, as well as emails and letters—facilitates your account holders’ ability to avoid unexpected shortfalls and fulfill all their financial needs.
Effective staff training is the foundation of an effective communication strategy—or where one can fall apart if your staff lacks confidence regarding how to effectively explain your service and answer questions when there is something your account holders don’t understand. Plus, making sure information is provided equally across the board—not just to frequent overdraft users—gives account holders more than just confidence, it strengthens loyalty on all fronts.
It all adds up to a relevant service for consumers’ financial needs
In the last few months, CFPB-regulated institutions have been promoting themselves for doing a good thing by eliminating overdraft fees. But where does that leave a consumer who is facing an emergency expense a few days before payday?
There is a place for a low-cost, no gotcha overdraft solution that consumers can rely on to solve occasional liquidity needs. And who better to provide that service than their trusted financial institution.
If you have a transparent, user-friendly program that answers your account holders’ needs, while adhering to industry best practices, you’re also doing a good thing. What’s more, a re-evaluation of your program can ensure you’re doing the right thing, based on the needs of your market and not what makes the evening news.