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It happens all the time. A member thought they had enough money in their checking account to cover whatever it was they decided to buy on any particular day. 

Only they didn’t have enough money, and the transaction is now processing, soon to reject said transaction and inform their credit union. 

Word has been out on overdraft fees (and non-sufficient fees) for a while, and leaders around the credit union movement and the financial services industry are reevaluating their overdraft protection (ODP) and “courtesy pay” programs. Amid changing consumer preferences and expectations of financial institutions, fintech’s increased influence, and the stark imbalance of impact on lower-income members and communities of color, the concept of ODPs – what they are and their various effects on those communities – is undergoing a dramatic reassessment among America’s financial institutions in 2022. 

What are ODPs, and what they are NOT

Established over two decades ago, overdraft protection programs were expected to offer security for vulnerable members acquiring non-sufficient funds (NSF) fees, both from their credit union and the body from which they intended the purchase. The point of ODPs was to help complete the member’s transaction, escape a fee from the recipient, and only receive a fee from the credit union for the service.

This current movement, however, has been drawing unprecedented scrutiny from lawmakers, consumer protection groups, and federal watchdog agencies for doing more damage to the consumer’s finances than good, exacerbating the fees the consumer incurs per instance. Two decades in, it’s more than fair to ask: are these overdraft “protection” programs providing the advantages as they were originally intended, or propagating a culture of persistent financial exclusion? 

A decline in interest rates over the decades has reflected lower yields for credit union loans. As a result, many financial institutions have come to rely on various forms of ODPs to preserve their non-interest income. The fees associated with these services have been a sore point since their inception, and have shown to disproportionately impact a specific segment of consumer, most often the lower-income and underserved communities. 

The key word when it comes to overdraft protection, however, is that last one: protection. QCash contends the negative effects of so-called “courtesy” pay fees eliminate any protection such services provide the consumer. Courtesy pay services are used for payments if the member has insufficient available balances to cover the purchased items. 

Unfortunately, the member’s account will result in a negative balance up to the courtesy pay limit. In addition, the member will be charged a courtesy pay fee for EACH item covered, causing a potential cavalcade of destructive fees. That’s not protecting your members; it’s perpetuating their financial instability.  Millions of lower-income consumers can attest to the fact that these types of fees, along with insufficient funds fees, are burying members and consumers deeper and deeper in debt. 

The Office of the Comptroller of the Currency (OCC) advises members and consumers what they need to know about courtesy pay, or bounce coverage, plans: 

  • Members need to avoid using these programs as short-term lending solutions; they are costly forms of credit
  • If a member overdraws their account, they need to replace those lost funds as soon as possible; in addition, they need to put enough funds back in to cover both the amount of the overdraft fee AND any service fees
  • Even if the member is enrolled in such plans, there is no guarantee the institution will cover their checks, ATM withdrawals, debit cards, and other electronic transactions that can overdraw members’ accounts
  • Ultimately, sound account management is the best, lowest-cost habit to protect one’s finances. If a member requires ODP every once in a while, they should consult you, their credit union, about the financing options available that are right for them.

The Consumer Financial Protection Bureau (CFPB) is now targeting the various “junk fees” that are now known to push low-income and underserved consumers towards predatory payday lending companies; companies who fleece consumers out of 9 billion in fees every year

Rather than courtesy pay, or a form of ODP that risks a cascade effect of fees, consider a stream-lined, simple, and much more affordable program like small dollar lending. Members are now able – through an access-anywhere fintech like QCash – to apply for a loan within 60 seconds when they sense their checking account is getting a little too low for comfort. Wherever they are, whenever caution occurs to them, they can log on to your credit union mobile app and take care of such costly risks before those costly risks destroy their checking accounts.

credit unions small dollar loans
Photo: Luke Porter | Unsplash

Focusing ODPs back to serving your membership

 When consumers don’t have to worry about money, the random overdraft fee, or the irritating insufficient funds fee, has next to no effect on your financial life. When it comes to a family living on the edge of a financial cliff, however, the consequences can be disastrous. A single overdraft fee of $35 can be just the beginning of an avalanche of fees within the same instance that can turn a family’s financial instability into a full-blown crisis.

In a recent Washington Post article on overdraft fees, CFPB director Rohit Chopra clarified the mischaracterization of such programs. “In many cases, junk fees often act as penalties, like with non-sufficient funds and credit card late fees, rather than compensation for a legitimate service. While it may make sense for [financial institutions] to pass on the cost for extra services provided, many complain these fees are far higher than the service is really worth.”

For example, the revenue from overdraft and non-sufficient funds fees – typically costing $25-$30 – surpassed $15 billion. 

“We’ve seen that hidden and surprise fees can drive consumers out of the financial system,” says Alex Horowitz, Senior Officer for Pew Charitable Trusts’ consumer finance project. “They can lead to closed checking accounts. They do the most damage to households that have the least margin for error – so low-income households, low-asset households, and households of color.” Horowitz adds that five percent of checking account customers are paying over 20 overdraft fees every year. 

If what Horowitz says is correct, we may be witnessing a fundamentally altered state in the financial services landscape, with overdraft fees and “junk fees” actually becoming a competitive “red flag” in consumers’ eyes. If such a development doesn’t occur soon, there may be potential for increased oversight from the CFPB while loads of other financial institutions line up on the tarmac and fly off into the no-fees airline of the future. 

What credit unions can do is draw attention to the movement’s superior non-sufficient funds and ODP programs. They can encourage existing and potential members to read [other financial institutions’] fine print, where chances are they will discover the hype doesn’t match reality. 

Most of all, they can promote their journey of searching for more affordable services that can meet the small dollar lending needs that remain critical to community members who really need it.