It’s time for CUs to rethink their overdraft programs and deploy strategies that enable an ideal member experience.

By Joel Schwartz
August 23, 2023

The loud “ouch” heard at credit union offices on July 11, 2023, was due to Bank of America (BofA) being hit with a $250 million fine for a variety of actions, much of it related to NSF fees. Specifically, the CFPB report cited that BofA was “systematically double-dipping on fees imposed on customers with insufficient funds in their account,” and was fined for this and other charges, according to the CFPB.

That painful reminder of regulatory scrutiny on this topic follows a wave of recent class-action lawsuit settlements related specifically to overdraft practices at credit, including $5.2 million at Empower Federal Credit Union ($3.2 billion in assets, Syracuse, N.Y.) and $3.7 million at Redstone Federal Credit Union ($7.4 billion, Huntsville, Ala.)

The issue of overdraft reform is a pillar of the Biden administration’s press for a reduction in “junk fees,” as they are lumped in with excessive hotel, airline and concert fees. The concept of fee reductions is popular with consumers, and the NCUA is paying attention: As recently as May 22, 2023, NCUA Chairman Todd Harper explicitly told the Indiana Credit Union League that “it may be time to rethink your overdraft program.”

A problem that is simultaneously no one’s specific responsibility at a credit union is suddenly becoming everyone’s responsibility.

Credit union executives across the country are concerned about the consequences of potentially taking these fees down to zero, and even eliminating courtesy pay and overdraft programs altogether, because they also know that these measures alone aren’t going to provide members the service they expect. Plus, when accounts go overdrawn, and the credit union covers it, the costs associated with that work need to be funded somehow.

The good news is that there are regulator-friendly steps that credit unions can take to help their members, including deploying some innovative technology solutions designed specifically to help address this issue. These include:

• Faster approvals on small-dollar loans. Traditionally, getting a loan can take a long time with a lot of paperwork. That applies to loans of $500,000 down to $500. But new technologies, including some powered by artificial intelligence, have allowed for quick applications, decisions and funding of smaller-dollar loans, and this is even integrated into some online banking systems. These loans help members manage cash flow in a pinch.

• Better communication tools. When an account is overdrawn, financial institutions are required to notify every customer, consistently. Many credit unions still send letters to members to let them know that their account had an NSF – but a letter arrives days after the incident happened. As witnessed with BofA, a lot of transactions, and repeat attempted transactions, can happen in a just few days, resulting in compounding fees for consumers and businesses. Rapid communication via text and/or email on what’s happening with the account can not only help with visibility, but also increase member trust and long-term loyalty.

• Putting transparency and control into the hands of account holders. Typically, members have had limited insight and knowledge of their options in an overdraft situation, which can result in high fees and high frustration levels. By providing account holders with increased fee transparency, and the controls to take action on their account to resolve transactions and quickly identify fraud, credit unions can provide members a path forward in a way that aligns with their own financial situation. Regulators have never complained about providing too much transparency and control to account holders. These kinds of moves usually result in a positive outcome for all parties: The consumer, the financial institution – and its regulators.

As a side benefit of evaluating new technologies such as these, credit union executives may discover outdated operational processes and proactively make member-friendly improvements.

Ultimately, as Chairman Harper noted, and as recent headlines have indicated, it’s time for credit unions to rethink their overdraft programs and deploy strategies that enable an ideal member experience. Some have already made efforts to avoid being caught in regulatory crosshairs by eliminating overdraft fees, but this strategy alone does not address the heightened level of transparency and control that regulators are seeking.

No financial institution wants to be singled out for their policies and practices. Using technology to de-risk compliance challenges can help put credit union executives in a more friendly light with regulators and their members.

Original opinion article published in Credit Union Times and can be read at https://www.cutimes.com/2023/08/23/bank-of-america-teaches-a-250-million-lesson/