By Ray Birch
BROOKFIELD, Wis.—Credit unions don’t want to be the “last man standing” when it comes to charging overdraft fees, and to avoid that fate means the death of free checking at cooperatives, according to one analyst.
In the place of free checking will be relationship-priced checking accounts that allow members to “earn their way to free,” predicts Fiserv Consulting Director Brian Boardman.
Boardman’s comments appear here as part of a series in CUToday.info examining the implications on credit unions of the elimination by big banks and some CUs.
Boardman said the nation’s largest banks have a strong motivation to drop OD fees.
“At some point credit unions are all going to have to move on overdraft fees,” said Boardman, acknowledging some credit unions have already responded by adjusting their.
The real challenge, however, will be for smaller credit unions that have become quite dependent on overdraft revenue to follow in banks’ footsteps, he said.
Boardman said the banks’ decision to cut their fees to zero or just a few dollars on bounced checks is a byproduct of two factors: the pandemic and increased congressional and media attention.
Adjusting to Adjustments
During the pandemic, many banks responded initially by saying they would temporarily reduce or eliminate their overdraft charges. Once those same banks adjusted to the decreases in their bottom lines, they were able to make the pricing changes permanent as consumer groups and Congress began to focus on the issue.
“Banks have spent the last two years with significantly reduced overdraft income,” said Boardman, who acknowledged many credit unions encountered the same bottom line implications22. “Consumers’ checking accounts have been flush with cash due to all the government stimulus money. So, those who used to typically overdraw their accounts had additional money in their checking and have avoided overdrafting.”
Many consumers, too, have had their overdraft fees waived as banks and credit unions helped consumers get through the health crisis.
“What I believe has happened is these banks and larger institutions are leveraging the fact that overdraft income has been down, they have become accustomed to operating without it, and they see the marketing opportunity,” explained Boardman.
It was an opportunity for the big banks to promote themselves as being more consumer friendly and to attract business away from smaller institutions, he added.
Avoiding the CFPB
Brian Boardman
But the strategy involved more than just seeking to improve their reputation with consumers; banks also want to avoid the crosshairs of the CFPB, which apparently is zeroing in on overdraft charges, said Boardman.
CUToday.info has also reported numerous stories on the new focus by the CFPB on OD fees.
“The CFPB is obviously focusing here and is going to look at overdrafts hard,” Boardman said. “And the bigger banks have been under a lot more scrutiny from their regulators and the Bureau. Now, they don’t want to be under greater scrutiny. Therefore, they are taking advantage of the fact they have learned to get by with much less overdraft revenue and now small community banks and credit unions are going to have to catch up.
“I don't think they're going to want to be the ones that are still charging $25 or $30 for overdrafts when larger banks have reduced or cut them, and they're already losing customers to those larger banks,” Boardman continued. “They don’t want to be the last man standing. Just like checks, no one wants to be the last financial institution holding that last check ever written.”
The (Only) Road Ahead
But can smaller credit unions afford to markedly reduce or eliminate overdraft fees? Boardman said the smaller players really have no choice and that CUs of all sizes will eventually have to drop the charge or lose members.
“This is going to lead to more relationship-priced checking accounts from credit unions,” predicted Boardman. “Checking has to be restructured to do away with free checking—this is the death of free checking.”
Boardman reminded that relationship-priced checking can be structured so that the account charges a monthly fee but allows members to “earn their way to free” and have the charge waived by taking more services from the CU, including services that save the credit union money, such as e-statements.
Managing Risk
In eliminating overdraft charges, Boardman emphasized organizations should not become fee adverse.
“There are still other fees, other things a credit union will charge members for,” said Boardman. “What we often find is credit unions have set fees up wrong or they're waiving them or refunding them more than they should. Credit unions need to make sure they are validating that the revenue sources they have set are in fact set up correctly. Refunds are part of every business, but you don't want to be waiving 20% of your fees. You want to try to manage that down to 10% to 15% or even lower.”
Boardman pointed out that even with changes to overdraft policies, some accountholders will continue to withdraw or charge more money than they have in their accounts.
“However, the reduction or elimination of fees associated with these updated policies mean the compensation organizations receive for taking on risk for their deposit customers will be significantly reduced,” Boardman explained. “Processes and technology will need to change to reflect this changing environment, including a focus on setting appropriate overdraft limits. Assessing and managing risk at the account level will help financial institutions set dynamic overdraft limits based on customers' history, behaviors, transactional information and ability to repay.”