By Ray Birch
MADISON, Wis.—The quickly changing overdraft landscape requires credit unions to take action, as the service is increasingly out of step with the new financial landscape, new data from the Filene Research Institute reveal.
That action does not always mean adjusting pricing. Instead, what is more critical is strong communication with the membership, according to Paul Dionne, research director at Filene.
Dionne explained that the competitive pressures on which CUToday.info has been regularly reporting—such as moves by some big banks and some credit unions to reduce or eliminate overdraft charges—are changing consumer expectations of overdrafts. In turn, he said those changes have sparked a public re-evaluation of overdraft protection programs.
“On one hand, ODP presents a unique opportunity to highlight your credit union’s mission and values. On the other hand, credit unions that fail to seize this opportunity may risk alienating current members as well as younger generations of potential members,” said Dionne.
Dionne acknowledged the challenge facing many credit unions. While some have sufficient revnue to reduce or even eliminate overdraft charges, other CUs simply can’t take such a hit to their bottom lines.
“Overdrafts touch on so many aspects of the business model, and your brand, and how you interact with your members, that you need to pay attention to all these factors when you are doing your analysis of your overdraft program,” said Dionne. “This is not the kind of project you just give to whoever's running the program to make technical changes. You have to pay attention to all those other factors like brand and value proposition and voice of the member.”
Paul Dionne
Being Clear & Open
What is critical for credit unions, said Dionne, citing Filene data, is that credit unions talk clearly and openly to their members about overdrafts, including what the credit union’s policy is and why.
“They need to be clear and really explain what they're doing in terms of whatever policy it is,” he said. “I don’t want to generalize and say everybody needs to bring overdraft charges down to $5; the research is not saying that. But whatever credit unions do, or they don’t do, they need to communicate that with members,”
And the big reason for doing so, stress Dionne, is because in the current overdraft environment, with all the headlines related to changes in the market, there is a significant distrust among consumers regarding ODs, said Dionne.
“There's a lot of activity in the media landscape, and members are wondering what's happening with my financial services provider,” said Dionne. “And the younger members are making decisions based on so many factors. Top line, credit unions need to communicate better with members about what they're doing regardless if even that’s not making changes. They need to explain to members that what they are or are not doing is in the members’ best interests.”
Other Steps
In addition to good communication, the study found credit unions need to be taking other steps, the study found.
“Although there is no one-size-fits-all solution or product, there are three important steps that credit unions can take to review and update their products and services relating to overdrafts. If the project is too challenging or staff time is tight, there are vendors available to help with these steps,” Dionne said.
He said CUs should begin by digging into their data to learn which members frequently overdraft, when they are likely to do so, and why it is happening.
“Also, experiment with member-friendly reforms while paying attention to how reforms will affect your business plan, operations, and value proposition,” said Dionne. “And then investigate and develop alternative options for growing non-interest income.”
An Alternative
One alternative being chosen by some credit unions is the addition of value-added, fee-based products and services.
“One of the things that some credit unions are experimenting with and finding some success with is alternative ways of generating non-interest income—subscription-based models,” explained Dionne. “Instead of a free checking account you can have a subscription-based model. You can have a premier checking account that costs $5 or $10 a month. Maybe it includes having non-sufficient funds covered to a certain limit, basically a line of credit that's connected to that account for heavy overdrafters. These members might be more than happy to pay five or ten dollars a month for that service because it will cost them a lot less in the long term than paying NSF fees.”
Dione added that bundling in other services for the monthly checking fee, such as fraud and identity theft protection, has been appealing to members.
Out of Step
Finally, the research suggests overdrafts are not suited for the current financial environment.
“Overdraft programs were developed over 40 years ago when most people relied on paper checks,” noted Dionne. “The way consumers bank, spend, budget, and transfer money has changed dramatically since then. Paper checks and cash withdrawals from a branch have been largely replaced by debit cards. It has become easier to check account balances on your phone. Yet, without real-time payment accounting, it remains difficult to keep track of pending charges, especially with the much higher volume of daily transactions.”
Today, members might be better served with other solutions than overdrafts, said Dionne.
“Maybe it's providing them some way of smoothing their income, or either early payday loans or early paychecks, or give them a small-dollar line of credit,” he suggested. “There's other solutions out there that might better address specific needs members have today. But they're relying on overdrafts to serve those needs, and that’s really not the best solution anymore.”