Overdraft fees come under critical scrutiny in new Filene report

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Some credit unions are unhappy with their overdraft policies and are considering ways to make them fairer and more helpful to members, according to research released Thursday.

The Filene Research Institute of Madison, Wisconsin, conducted in-depth financial analysis and interviews with 16 credit unions for its 35-page report, “Overdraft Protection Programs: Credit Union Best Practices” written by its economist, Luis Dopico.

Many credit unions felt that their programs were either simple but ineffective (“one size fits all”) or too complicated for members to understand. Analyzed from a different angle, many credit unions are re-evaluating their programs to gain a more nuanced understanding of their members’ needs and motivations.

Responses from credit unions were anonymous, but the sentiments were echoed by the many banks and credit unions that announced they were eliminating or reducing their overdraft fees.

This week, Bank of America joined Capital One and Wells Fargo in eliminating punitive overdraft fees.

Among credit unions, Alliant Credit Union of Chicago ($14.7 billion in assets, 631,700 members) eliminated overdraft fees entirely last summer, and many others have announced plans to eliminate or reduce them considerably.

Overdraft protection programs are relatively new among banks and credit unions. They quickly gained popularity after 2000 as a way to help members avoid a series of insufficient funds (NSF) charges from their bank and the merchant.

For example, an 18-year-old bank customer in the late 1970s had consistently low checking account balances and inconsistent subtraction exercises. He tended to make many small purchases in the $2 to $4 range at fast food restaurants, like Sam & Andy’s on The Strip at the University of Tennessee in Knoxville, which served a cooked roast beef sandwich. steamed irresistibly appetizing with smoked cheddar cheese.

The local bank, whose motto was “We start with you”, started with him at least a few times. He discovered that when a check bounced, he incurred a $25 charge from the bank and the restaurant. And right behind bounced checks two, three and four.

The bank did not have to fear damage to its reputation. The FDIC raided the bank in the early 1980s and its president pleaded guilty to bank fraud.

This unfortunate would have been considered a “light overdraft”, who discovered only once or twice a year and represents about 16% of the members. The largest group is that of the “undiscovered”, which represents 82% of the members.

“Big overdrafts”, which represent less than 2% of members, include “crisis overdrafts”, which experience a large number of overdrafts as a result of job loss, medical emergency or another crisis. Then there are the “usual overdrafts” who continuously overdraw their accounts, month after month, for long periods of time.

“Many habitual overdrafts may choose to overdraw their accounts intentionally, using the service as a personal financial management or income-smoothing tool,” the study said.

Luis Dopico Luis Dopico

The study challenged credit unions that approach overdrafts as demerits of virtue, or view the practice as evidence of ignorance, requiring a heavy dose of financial education.

He also acknowledged that overdraft fees have become important sources of non-interest revenue for some credit unions. Since net income margins have generally declined as a percentage of average assets since 1980, non-interest income has increased.

Among the credit unions in the sample, non-interest income represented 1.44% of assets and overdraft protection income represented 0.17% of assets. Addiction varied widely. Overdraft revenue “approaches rounding errors in the financial statements of some credit unions, but represents significant fractions of revenue for others,” according to the study.

Many of the credit unions in the study were concerned that overdraft revenue would be taken disproportionately from the 2% that are large overdrafts. They feared that income from overdraft protection bore little relation to the risks or costs of overdrafts. Among respondents, overdraft protection charges accounted for 0.014% of assets or 8% of overdraft protection revenue.

And, they feared that ultimately, overdraft protection fees “would result in members with lower incomes and weaker credit histories subsidizing the services provided to members with higher incomes and credit histories.” stronger credit ratings,” according to the study.

The study indicates that an anonymous credit union is introducing a new premium checking account with a monthly maintenance fee of less than $5. Members using this premium offer would be exempt from courtesy payment fees and incur a very low insufficient funds fee ($7).

“The credit union intends to promote this offer not only to large overdrafts, but also to non-overdrafts and light overdrafts, promoting the product as offering peace of mind,” it said. -he declares.

Some credit unions are considering deposit accounts that are automatically linked to home equity lines of credit in an effort to minimize overdraft protection and NSF charges.

Credit unions could also misread their members and numbers. Although overdraft protection programs are technically not loans, they may not recognize the extent to which members demonstrate their creditworthiness by reliably repaying their courtesy payment (CP) balances.

Based on low write-off rates, the study indicates that credit unions could consider:

  • Increase courtesy payment limits to members who reliably repay their CP advances.
  • Reduce courtesy fees to members who reliably repay their CP advances.
  • Transitioning members who reliably repay their CP advances to standard loan products that are, in terms of rates, cheaper for members, such as small loans, credit cards and, in particular, lines of credit.
  • Experiment with larger lines of credit for most members, especially those who deposit their income directly.

“Credit unions can serve members with weaker credit by offering, among many other services, small loans, personal loans, bailout loans, debt consolidation loans, credit cards secured credit and credit cards with limits that start low but can increase as members’ credit histories improve,” the study states.

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