By Ray Birch
MADISON, Wis.—The biggest risk credit unions face from the changes taking place in the overdraft market is members’ and consumers’ views of their pricing and how that will affect the “future relevance” of their organizations, according to several experts, including two CUs that have changed their pricing.
The risks, which one CU called a “relevance threat,” rise above concerns over possible OD legislation and even the wave of overdraft lawsuits that have been sweeping across the nation, said Mike Schenk.
“The biggest risk really has to do now with how consumers view pricing and how that could impact income erosion,” stated Schenk, CUNA’s deputy chief advocacy officer and chief economist, during a recent Filene Research Institute webinar on overdrafts.
As CUToday.info has extensively reported, moves by a growing number of banks and credit unions to greatly reduce or remove overdraft charges is affecting consumers’ opinions of what financials should or should not be charging for ODs. Moreover, in Washington both Congress and especially the CFPB have announced they are focusing on how financial institutions handle overdrafts.
“Credit unions have been historically responsive to the marketplace and to members. I do know that roughly 80% of credit union members also have a relationship with a bank,” Schenk said. “Periodically examining our products, pricing and delivery mechanisms is a best practice, and now seems to be a pretty good time to do that.”
‘Very Troubling’
Mike Schenk
Schenk agreed the focus has changed in Washington.
“As you know, CUNA has had long-standing and ongoing concerns around one-size-fits-all regulation across administrations,” noted Schenk. “But I think policy, clearly has shifted with the current administration and we see an obvious rhetoric on the regulatory level, and a really troubling shift away from an emphasis on market-based solutions to threats of mandates and regulation. That's very troubling and very concerning for us…Self-determination is, always has been, and always will be the cornerstone of all of our advocacy efforts.”
Schenk added that CUNA currently supports the ability of credit unions to offer overdraft protection plans to help their members resolve short-term financial problems.
“And we support consumer-friendly, transparent plans that are not marketed or promoted in a misleading or deceptive manner,” he said. “We oppose efforts by the Consumer Financial Protection Bureau or other federal entities to eliminate the ability of creditors to decide how to design overdraft protection programs. That's kind of our starting point at the moment from an advocacy perspective.”
Perceptions of Credit Unions
As public attitudes begin to play a larger role in credit unions’ overdraft pricing decisions, Schenk noted how members view cooperatives, and where they place their trust.
“We do an annual voters survey which we present at the GAC,” explained Schenk. “The results have been pretty consistent over time showing that credit union members see their institutions as being different. In the most recent voter survey that we did just a month or so ago, consumers say that they value credit unions for making money for them, and not making money off their backs. They say they are one-and-a-half times more likely—than consumers who don't use credit unions—to say they are very positive about how their credit union impacts their financial well-being. The other aspect of this is that consumers, collectively, strongly believe their credit union represents their personal interests more effectively than consumer groups, and they trust them to represent their interests in front of federal regulators and Congress.”
Harry Zhu
One Credit Union’s Decision
Among the credit unions that have moved to eliminate their overdraft charges is Alliant CU in Chicago, which was among the first CU to respond to the changing market.
“When we made that decision to completely eliminate overdraft and NSF fees, we looked at a couple of factors,” explained Harry Zhu, chief lending officer at Alliant, who noted the $15.1-billion organization falls under the oversight of the CFPB, in addition to CU regulators. “The CFPB is homing in on fees charged to consumers. And, specifically, within the fee category overdrafts are something they do pay attention to. There is not rulemaking yet, but they are closing in here.”
Zhu said Alliant CU’s first CFPB examination made it clear fees are in the Bureau’s crosshairs.
“They started in the deposit side of our business. They didn't start with lending. That, to us, said a lot in terms of where their interests lie,” Zhu said. “So, we considered how can we get ahead of that curve.”
But CFPB interest was only one factor influencing Alliant’s decision, Zhu explained.
“We looked at this from a competitive angle,” he said.
As the 646,000-member Alliant operates on a digital services model, Zhu said it sees Ally Bank as a direct competitor. The digital bank was the first major bank to announce it was eliminating overdraft charges.
“We asked ourselves this question: In order to really compete for the same members and consumers, is that the right thing to do?” said Zhu. “Fees are one of the top reasons consumers switch to a different financial institution, and they are also one of the top reasons why they call in and complain.”
Jay Champion
Westerra CU’s Decision
Jay Champion, president of $2-billion Westerra CU in Denver, emphasized overdraft decisions are individual to each credit union, and their own unique situations and memberships.
In September, 2021, Westerra CU announced it was eliminating its overdraft fees.
“We are also a fan of the fact that every credit union needs to make their own decision, one that's right for them,” Champion said. “We don't charge for NSF or overdrafts.”
Champion explained Westerra benchmarked against the fintechs and looked hard toward the future.
“As an industry we have an average age problem to correct,” he said. “The average age of credit union members is about 47, and the average age of an American citizens 38. Our average age (at Westerra) of members is even higher than the credit union industry. So, we were thinking, beyond thinking out five years, what do we need to do to remain competitive. I don't see an existential threat from things like the political winds of regulation this year or in the coming years. But I do see a relevance threat. And that is if we can't compete with the fintechs…There's recent data that show more people use a fintech now than social media or online streaming services.”
Champion said this raises the threat of credit unions getting “pushed out of our own business.”
‘We Love You, But…’
He emphasized that for Westerra to compete in the coming years, it must remain relevant and competitive with fintechs, which charge few fees.
“In focus groups and surveys we conducted it was frighteningly clear that people said, we love you, we love the fact that you're our credit union and we feel you have our back, but this fee thing I hate,” Champion said. “This was right before the pandemic…Those are the things that really came into our mind when we put all this together and said this is the right decision for us. This is an issue of future relevance.”
