By Ray Birch
LAKE FOREST, Ill.—President Biden’s State of the Union Address last week should be a wake-up call for credit unions that are not yet addressing overdraft charges and overall fee structures, according to one expert who believes credit unions’ white hats could be on the line.
The president had no sooner concluded his joint address to Congress than both trade groups were pushing back on the president’s call for a crackdown on “junk fees.”
Now, Michael Moebs—a leading expert on overdraft services who has been closely following the debate on overdraft prices in Washington and in at the state level—told CUToday.info that Biden’s remarks are the most significant message that has been sent by Washington on fees, as the CFPB and consumer groups zero in on OD charges.
“The nationwide and even worldwide presence of the State of the Union Address is about the strongest sign there is that financial institutions need to adjust overdraft and fee prices,” said Moebs, economist and CEO at Moebs $ervcies. “If you noticed last week, Biden spent more time on junk fees than he did on China, inflation or the border. This reinforces where the White House, Treasury and CFPB believe is a high priority—reducing financial services fees.”
Broadly, the president said, “My administration is also taking on junk fees, those hidden surcharges too many businesses use to make you pay more.”
A Growing Focus
Reducing fees, and making them more transparent, has also become a growing focus at the state level, as CUToday.info reported, a new overdraft law has gone into effect in California that could impact credit union OD pricing, and possibly make some CUs targets for consumer groups.
As CUToday.info has reported, SB 1415 requires CUs and banks subject to the authority of the California Department of Financial Protection and Innovation (DFPI) to disclose the revenue they earn from overdraft and nonsufficient funds fees. Credit unions and banks, regardless of charter type, that are headquartered outside of California but with facilities in California are subject to the California law.
What Analysis Shows
Moebs $ervices’ ongoing studies on overdraft pricing shows that credit unions and fintechs are doing a better job than banks at lowering overdraft charges and being transparent with overall fee pricing.
“While this is a complex issue—ranking banks, credit unions, thrifts and fintechs—it is a tie between CUs and fintechs for those institutions that are doing a better job here,” said Moebs. “Banks are clearly far behind in adjusting price.”
Moebs noted, however, that the very largest banks, those who make up the majority of what he calls the “Big Checking” club as they each have more than one-million consumer checking accounts—have been leading the way in dropping overdraft charges and making it a strong emphasis in their marketing.
Michael Moebs
“But this is a select group of banks,” said Moebs, noting that a few credit unions are in the club, including Navy Federal.
Dirt on the White Hat
While credit unions’ efforts to lower overdraft price and be transparent fall in line with their “good guy” reputation, Moebs believes the white hats CUs are proud of wearing could get knocked off.
“CUs can continue to be the good guys if they make fees even more transparent to the consumer. This means their deposit agreements need major revamping, along with their pricing and risk,” Moebs suggested.
Moebs emphasized that with California—and with other states possibly following—pushing for fee transparency, including listing of fee revenue, signals even more trouble ahead for those whose fees are too high.
“The median overdraft fee ($30) does not fit the needs of the consumer nor profitability,” said Moebs. “The consumer would be better off if the fee is lowered to about $20, and so would financial institutions, as they would make more money due to more overdraft transactions.”
Steps To Take
Moebs outlined steps credit unions should take to address overdrafts, many aimed at operational efficiency:
- Reduce the cost of underwriting. Moebs recommends moving away from labor intense underwriting to analytical decisions which can be done by operating systems
- Control the risk of unsecured by using FICO scores
- Increase limits to cover errors made by mortgage or rent payments
- Cap daily OD charges
- Lower the OD price to reflect these cost reduction moves
Missing the ‘Complete Package’
Moebs contended the attacks on “junk fees” by the White House and the CFPB do not capture the “complete package” of overdraft fees.
“This includes other services, such as NSF, stop payments, return of a deposited item, deposit transfers, line of credit transfers,” he said. “Pricing features are not understood by Biden and the CFPB and this includes: daily caps on OD charges, pre-payroll grace, grace days after payroll, de minimis transaction amounts, de minimis balance amounts, end of day overdrafting, overdraft limits, and more features, especially on compliance.”
While the junk fees referenced by the president included a range of such fees that could be eliminated, Biden did make reference to a recent CFPB proposal related to credit card fees, as well as overdraft fees.
https://www.cutoday.info/site/Fresh-Today/Trade-Groups-Push-Back-on-Biden-s-State-of-the-Union-Comments-About-Junk-Fees-OD-Costs-CFPB-Proposal
In addition, a group of House Republicans is calling on the CFPB to withdraw its proposal on overdraft fees.
‘Out of Touch’
“The White House and the CFPB are out of touch with the needs of the average American when it comes to financial services,” said Moebs. “While I agree that the price of an overdraft should fall, other features must be put in place first. Costs are the key. Reduce labor, reduce price, reduce daily total charges, yet increase limits beyond the average monthly mortgage or rent payments. The wise depository would adjust their overdrafts soon to fend off advances by the White House, CFPB, and U.S. Treasury—and that includes credit unions that want to keep their white hats.”