By Ray Birch
MADISON, Wis.–One credit union that recently reduced its overdraft fee to just $5 says it’s time credit unions begin exiting the overdraft business–and it offers an interesting cost offset many CUs may not have considered.
The $4.6-billion UW Credit Union began to move away from its reliance on overdraft income 10 years ago. Now, CEO Paul Kundert says those gradual changes are paying off as consumer groups, Washington and lawyers focus on overdrafts.
“It's time to become less reliant on overdraft revenue for a number of reasons,” Kundert told CUToday.info. “I don’t think these practices make sense for consumers, and I don't think they reflect our operations today in terms of costs of providing these services. I think at some point, due to market forces or regulatory action, these hefty fees are going away. Therefore, if you want to build a sustainable financial services company and you want to provide transaction services, I think you need to find a way to be successful without that income propping up the business model.”
Prior to reducing its fee, UWCU charged $30, which is the national median for overdrafts, according to Moebs $ervices. Kundert said the credit union was able to reduce its fee as the result of all the gradual changes it had made, starting a decade ago. The CEO and the credit union recognized the organization would be giving up significant non-interest income, but made the sacrifice to help consumers, especially low-income and minority segments.
More Than 230,000 Account-Holders
Kundert pointed out UWCU provides checking services to more than 230,000 people, placing the organization in the top 1% of credit unions in the U.S. for transaction volume.
“This volume of transaction services could produce significant levels of overdraft income, but we took steps more than 10 years ago to drastically curtail it. The reason overdraft fees can add up quickly is because of the way financial institutions structure their processes, so we made some important changes,” he said.
UWCU set up its systems to not charge a fee if an account is overdrawn by only a small amount (up to $10).
“Then we set a limit of one fee per day. If four checks bounce in a single day, we would charge only one fee, not four,” Kundert said. “Then we arranged our practices so there are no overdrafts or fees resulting from debit card swipe transactions. Finally, we do not stack fees and do not add any additional fee for an account being in a negative status. The result? Our fee income per checking account is multiples less than the industry benchmarks.”
Paul Kundert
But that’s OK with Kundert and the organization given the return to members who are struggling.
“We really have forgone a lot of revenue,” said Kundert about the 83% reduction in its fee. “We've been really engaged in becoming a better organization around diversity and inclusion, and I think you make decisions based on information and insights. We were proud of what we had done over the years. However, we said to ourselves last year, there's still people paying us 30 bucks for overdrafts.”
A Shifting Marketplace
UWCU, which primarily serves the University of Wisconsin, is not alone in making changes to its overdraft policies. Ally Bank has announced it is eliminating its overdraft fees, and as CUToday.info has reported, so have Alliant Credit Union, Westerra Credit Union and WEOKIE CU.
“We saw some banks announcing they were going to stop these charges all together. So, we just thought when you look at this through an equity lens, the reality is that the most economically disadvantaged people in our communities, often people of color, may not have the spare time to shop around for alternatives, nor the clout to move the financial industry,” Kundert explained. “As a result, there are no market forces driving institutions to improve their practices and fees. I’ve never experienced poverty, but time spent volunteering has given me an opportunity to understand something about it. Being poor is demanding and exhausting.”
The Cost/Benefit Analysis
With costs related to overdrafts shrinking in part due to digital communications replacing paper, in 2020 UWCU began discussing ideas for making its overdraft program revenue neutral.
“We expect the latest move will cost us 1.3% of our total revenue,” said Kundert. UWCU reported $62.1-million in net income for year-end 2020. “That is not alarming in terms of the percent of overall revenue, but, still, that 1.3% has to be made up. I think the ways to make it up is we're expecting greater account retention, we need to continue to grow market share…And here is the interesting thing: It only takes a 3% in boost in employee productivity to fully offset that 1.3%. And, we will have many, many fewer calls from members about overdraft charges, which will save employees time and let them focus on more productive matters. I think it’s really time to look hard at getting out of the overdraft business and there are ways to do that.”