Overdraft Protection Update: Check 21, Float, ATM/Debit Access and Pricing Are All Factors CUs Offering OD Must Consider

WEST PALM BEACH, Fla. – Many credit unions are just getting their feet wet with overdraft protection and learning the nuances of offering it to its members. With all the changes going on that can affect overdraft, credit unions have to be willing to make changes on the fly. On the horizon for example is Check 21. With the decline in float expected (at some point) from Check 21, OD experts predict that credit unions will see increased overdrafts. Do credit unions have a duty to their members to lower OD fees in reaction to the higher volume of OD? Some say yes, some say no. Mike Moebs, chairman of Moeb$ Services, Lake Bluff, Ill., which offers overdraft protection services to credit unions, believes financials have to respond with pricing changes. “I think the average American is going to be blindsided. I think credit unions as well as banks have to realize that there is going to be a massive volume increase, so let’s start reducing the price. We have clients that are already doing this. It’s in the hands of credit union boards and senior management,” said Moebs. The average OD charge among credit unions is $20 compared to $23 at banks, said Moebs. He believes financials can cut their OD fees and still make the same if not more fee income after Check 21. As far as losing float time, Moebs said the U.S. has finally caught up with the rest of the world. “We’re going to be just like Canada, all of Europe and Asia and even Mexico. Most all of Africa and South America is there already. They do much more electronically then we are, moving faster than we are,” he said. Joe Gillen, CEO of Pinnacle Financial Services, which offers financials a variety of overdraft services, said he has no problem with a drop in OD fees as long as credit unions take into account the initial increased technology costs they will incur moving to the image based capture realm of Check 21. Gillen says the main thing is for credit unions to tell their members to say bye, bye to float. “I think credit unions and all financials should be telling their customers that float is not long for this world. Anybody who is over 30 years old grew up on access to float once they had a checking account. This will cause problems for the part of our population who has the least ability to deal with it, those who don’t have extra money in their accounts,” said Gillen. Gillen noted however that float has been decreasing slowly but surely since the `80s due to things like reg CC and the direct presentment of checks from one institution to the other. It’s not like the `70s when float could be a week or more. “Most of the float now comes from the U.S. mail,” he said. It will take three to five years, said Gillen, for the electronic exchange of checks in the U.S. to be in full bloom. Deb McLean, VP of Marketing and Public Relations for Charlotte Metro CU, said her CU has been offering overdraft since last May and members love it. McLean’s CU charges a relatively high OD fee of $30, but McLean said there’s a method to that madness. She said the CU raised the fee to match what Bank of America was charging because a lot of BofA customers were transitioning to the CU for a lower fee, or as McLean put it BofA was chasing these customers off to the CU. McLean said the problem was these were risky members. “They were typically members trying to pull something.” Despite the $30 fee, the CU is seeing a lot of usage of its OD product. McLean, who has won many industry marketing awards, said the CU doesn’t oversell the product. Information on OD is in the CU’s collateral new account material and is sometimes included in the newsletter. The CU also sent out a letter informing members of the service, giving them the option to opt out. McLean noted that at Charlotte Metro the OD fee only comes after members exhaust other options. “We also set it up as a last resort. When a member writes a check, we look at the share account first, then to the overdraft line of credit or a money market or savings account.” If none of that works, the CU pays the check and charges the OD fee. McLean said there has been some debate at the CU about lowering the fee and given Check 21 the CU is going to carefully watch activity to see if fees need adjusting. Some members love the peace of mind so much that the fee is the last thing on their minds, she said. McLean recalled one member who had opted out but after going on vacation and worrying if their mortgage check might bounce, they signed back up. As for the whole float issue, McLean said it’s not as big a deal today as say four years ago because float is now minimal, but she is running an article in the CU’s next newsletter explaining the effects of Check 21 on float. Opponents of OD services say the service encourages members to write bad checks. Security Service FCU SVP of Corporate Communications John Worthington disagrees, but there are members who use OD as a part of their financial management – willing to routinely take the OD fee as opposed to bouncing a check and incurring a creditor fee. “For some folks it’s become a way of life. We don’t encourage it. We run seminars on helping members to manage their money and maintain a checking account. Overdraft is working very well for our members. We’ve had no complaints at all,” said Worthington. In fact Security Service has extended the service to its debit and ATM cards. The $3.3 billion credit union surveyed its members about a year ago about their awareness of the program and their interest in overdraft being extended to their debit cards and at the ATM. The CU also asked members if they were interested in a limit increase of $300 to $500 on their overdrafts. Worthington said the member response was positive on both fronts. “One of the biggest things is they appreciate the fact that it saved them from being embarrassed at a retailer. It made them feel that we were concerned about them keeping a good credit record,” said Worthington. Security Service sent notices to all members with checking accounts alerting them of the limit increase and the expansion to ATM and debit cards. Worthington noted that the CU also explains to members that they have other options. For example, members can decide to tie their checking to their savings so if checking runs out, savings kicks in. Members can also take out a line of credit. Worthington said about 10-12% of the more than 500,000 members of the CU use overdraft protection. Moebs says extending it to “intentional” options like the debit card and at the ATM is wrong unless members are given plenty of opportunity to avoid the OD. “ATM usage is unintentional usage, that is wrong. If you do the ATM you must give the consumer options to get out. A check balance screen a `you’re overdrawn, do you still want to proceed screen,’ ” said Moebs. He said ideally members would have two opportunities to decline the OD. Moebs said one of the problems is that not all credit union data processing systems have the capability to do this yet, but he noted that DP vendors are hungry for this type of information so they can make the necessary changes. Milwaukee Metropolitan CU President/CEO Rich Koeing is a strong supporter of OD programs. He’s seen the virtue of the product at his CU with stories of elderly members who have avoided bouncing checks for prescription drugs because of the service, but Koeing said he would probably never extend the service to the ATM. The difference between OD on a check and the ATM is that checks are often for vital bills like mortgage payments, while at the ATM it’s all about cash. “ Then we’re talking entertainment dollars in a lot of cases,” said Koeing. Koeing said his CU makes about $100,000 a month on overdraft fees which has helped it keep its rates about 25 basis points better than its market competitors. Program limits are in place to assure members are treated fairly and that the CU doesn’t get into trouble said Koeing. At his CU, members have 30 days to pay back the check, if they don’t they are cut off from the service. Overdrafts are also limited to $500. The bottom line with OD said Koeing, is it protects members from being charged twice. [email protected]