Backlash on Overdraft Income Alarms Credit Union Executives

On Oct. 5, 2023, Politico published an op-ed with a subhead that called credit unions “predators” as it relates to overdraft and NSF fees. It did more than put credit union executives on edge – it made them angry and uncomfortable. Especially the 12 California credit unions it called out by name.

Credit unions are driven to serve their members. Their teams work hard every day to ensure that members are in the best possible financial position. So, what’s the best response to an article like this – especially since the CFPB may roll out its new plan at any time?

Some may choose to ignore it. However, once stories like this get out, the less trust the public has in financial institutions. The reputational risk for credit unions can be enormous.

NCUA Weighs In

While the NCUA put out a statement about the Politico article reinforcing the value that credit unions provide, leaning entirely on the NCUA isn’t going to quell executives’ frustration. Just days after the article ran, NCUA Chairman Todd Harper spoke to the REACH 2023 audience, which included senior executives from the California and Nevada Credit Union Leagues. His speech lasted about 20 minutes, and about 30% of that time was spent on the same topic: Overdraft and NSF fees.

“It is time for credit unions to rethink their overdraft programs if the industry wants to remain competitive and achieve its statutory mission and purpose,” Harper said. “The good news is that credit unions and banks that have already made the switch have not had to cut services to members or pare back operations. Instead, many have created new income streams. You, too, can diversify your revenue streams in creative ways.”

Feelings and Choices

I was in the room with several executives following Chairman Harper’s remarks. Here’s what I heard them say:

1. Fire the member who overdrafts. One CEO told me: “We should just close the account. We don’t want the liability.” While this is a simple solution likely said out of frustration, credit union executives and board members will immediately acknowledge that they are owned by members and offering an important service to their members. Kicking the member out for what could be a simple timing issue seems overly harsh. Plus, they would prefer that the consumer not become un-bankable.

2. Improve financial literacy. As one chief strategy officer said: “We don’t want our members to overdraft, we want to help them become more financially savvy.” Credit unions do a tremendous amount of work in their communities to help their members with financial literacy, and covering each overdraft comes at a cost. However, with student loan payments resuming and monthly auto payments at an all-time high, there’s a clear acknowledgement that consumer budgets are tightening, and even the best managed accounts can sometimes slip.

3. Put control in the hands of members. While reducing fees can have a positive impact, it only addresses one part of the problem, according to Jeff Carpenter, CEO of WEOKIE Federal Credit Union ($1.5 billion, Oklahoma City, Okla.). Overdraft programs aren’t inherently bad but can serve as a short-term liquidity service that many customers benefit from. By stripping the surprise element of fees and providing members tools to decide how fees are handled, credit unions can eliminate the “predatory” nature of overdraft programs, appease regulatory demands and increase customer satisfaction through transparency, Carpenter said. Coupled with lowering fees, WEOKIE gave members more power to decide how to handle NSF situations (i.e., transferring funds, declining the transaction before it led to a fee or attaining a short-term loan).

Fostering Financial Empowerment

There are three things I’ve heard are top of mind for credit union executives heading into 2024:

• Frustration with and embarrassment over the political and regulatory environment;
• Finding options that genuinely help members; and
• Staying competitive and recovering potential lost revenue related to overdrafts.

The Politico article was quite harsh toward credit unions. However, the publication’s influence in Washington shouldn’t be overlooked, as perception can often turn into reality. More articles like this in the mainstream media will instill deeper fear into the hearts of management and credit union boards across the country.

To prevent that from happening, it’s vital that credit unions, as member-focused institutions, prioritize financial education and member empowerment. By offering transparency and control related to overdraft and NSF fee situations, credit unions can go the extra mile to help members manage their finances responsibly.

Joel Schwartz is the Founder and Co-CEO of the Austin, Texas-based fintech DoubleCheck.