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Inside of one work week, Keri Fitzpatrick, a cook at her local middle school in Peterborough, N.H., was penalized for the $175 she didn’t have in her bank account. 

Her story, featured in the New York Times, explained that a line of automated payments over the next few days – her cell, auto insurance, and two credit cards – put her bank account in the red, loaded on top with $140 in overdraft fees. Add insult to injury, yet another unexplained penalty fee jumped on the pile at the end of the week. Fortunately, her paycheck came through, too. Not that it helped her credit score. 

Fitzpatrick blames herself, claiming she should have been keeping a closer eye on her money. But it’s always surprising how fast the transactions pile up, she said, especially with a susceptible account. “It’s not like one fee comes out for one day. It is $35 for each of those. It’s just outrageous.”

Many executives in the financial services industry seem to be coming around to Keri’s perspective when they see the effects of serving up a ladle full of overdraft penalties their own members or consumers cannot afford. 

Do we credit the COVID pandemic and the need for digital banking solutions for this realization? Maybe a little, but following decades of hoarding billions of dollars a year from mostly low-income and underserved Americans short on funds, the country’s largest financial institutions – finally under increased scrutiny from federal agencies and regulators – are incrementally releasing their stranglehold on consumers through the universally-disliked revenue practice. 

A number of financial institutions took significant steps in 2021 that would lessen the dollar amount they take from overdraft fees, which are applied when customers make purchase transactions or withdrawals – knowingly or unknowingly – in excess of the amount in their member account. For instance, Alliant Credit Union took a stand and announced in 2021 and forward they will no longer charge overdraft fees. “We go all-in for our members and eliminate overdraft fees altogether,” said Alliant president and CEO Dennis Devine. “Our biggest priority is doing what’s in the best interest of our members, and that means changing historic norms like overdraft fees and non-sufficient funds fees.”

Reality, however, hits like this: The idea that the financial services industry will break away permanently from overdraft protection (ODP) practices is doubtful. Rohit Chopra, director of the Consumer Financial Protection Bureau, recently stated that “for many big [financial institutions], overdraft fees are still the steady, reliable, predictable, easy revenue that shareholders love.” Chopra called for the CFPB to increase oversight on such dubious practices, claiming those financial institutions made more than $15 billion from such charges, largely impacting individuals and families who could least afford to pay them.

Michael Hsu, acting Comptroller of the Currency, parallels Chopra’s take that many financial institutions’ ODP programs aren’t going anywhere, but also offers that the consumer can always research better alternative financing. He claimed that there are “low- to no-cost” alternatives that would help those living paycheck-to-paycheck “to pay their bills on time, avoid high-cost alternatives and improve their credit profile.”

Photo: Roman Melnychuk | Unsplash

“…largely impacting families who could least afford to pay them”

Sure, we can claim that low-income individuals and the underserved suffer the most from ODPs. But who ARE they, and why should we believe you? Well, let those who put in the research and elbow grease tell you themselves. 

Research from the Consumer Financial Protection Bureau from 2017 – three years prior to the pandemic – discovered that individuals who overdraft maintained low daily balances in their accounts, placing them at consistent risk of overdraft. Leaning heavily on debit card use, such overdrafters had little to no available credit from credit cards, with a median credit score below 600. Additionally, their savings are, or nearing, nonexistent. The CFPB also discovered that frequent overdrafters – those who experience 10 or more overdrafts each year – made up only nine percent of all financial institution accounts, yet paid 79 percent of all overdraft and non-sufficient fund fees. 

If that’s not specific enough, here are four reasons why consumers overdraft, per The Financial Brand’s Jody Bhagat: 

Living paycheck-to-paycheck: Consumers can experience several cash flow crunch incidents each quarter, and overdraft repeatedly. They’re often barely able to cover their monthly expenses. 

Adversity: They may have gone through a recent difficulty, a financial or medical issue, that will likely exacerbate an increase in their credit line or create yet another overdraft incident.

Account mismanagement: The consumer has mis-timed their deposits to offset payments for the month, necessitating ODP. 

Simple oversight: The member or customer may not be short on funds at all. He or she simply overlooked the account that particular month, catching an overdraft situation. It happens. 

Unfortunately, the demographics of those who are affected the most by any of the four incidents above are all too familiar to those in the financial services industry. Per Financial Health Network (FHN), overdraft fees have disproportionately affected Black, Latinx, and younger consumers. Mirroring the CFPB’s findings, FHN researchers also discovered that overdrafters showed an increased likelihood of having non-prime credit scores, typically in the 601-660 range, according to credit bureau Experian. Generally, 43 percent of American households deemed “financially vulnerable” by the FHN disclosed engaging in ODP an average of 10 times in 2020 alone. 

Exploring alternatives to ODP programs

Credit unions have begun research on various alternatives or options to their ODP programs, ranging from smaller changes or experiments to full-scale re-envisionings of the practice. The Filene Research Institute compiled a list of alternative changes credit unions have implemented or are preparing to implement into their systems to offer at least a measure of financial relief to their members. These changes include: 

Reducing courtesy pay (CP) fees on small transactions

Reducing or eliminating CP fees on transactions that resulted in small negative balances

Adding credit cards to the range of ODP options

Eliminating transfer fees

Offering an automatic loan to cover for when an account hits a specific dollar amount, to be repaid in an agreed-upon period of time

Automatically waiving fees for situations where the fees are routinely refunded when requested

Reducing the number of times CP fees can be applied per period of time

Proactively reaching out to consistent overdrafters and offering financial counseling or coaching and workout loans

Incorporating alerts for low balances and budgeting tools

Integrating the QCash digital life event or specialty loan interface into your credit union’s core processor, online banking, and mobile banking platforms

Additionally, one credit union is introducing and promoting a new premium checking account with a low maintenance or “subscription” charge under $5. Those members choosing this service would be excused from courtesy pay fees and subject to very low non-sufficient funds fees. The credit union has plans to offer this product not merely to heavy overdrafters but all who overdraft and want to provide security for any future incident. The credit union is operating in the hope that increased maintenance fees will help reduce their reliance on their ODP revenue.

Getting ahead of the next overdraft charge

We would be remiss if we didn’t take one more time to emphasize the QCash life event lending platform that can easily integrate into your credit union’s mobile banking service. Our proven relational-underwriting engine examines the member relationship through behavioral data rather than the traditional, one-dimensional credit scoring system. Taking members only six clicks and 60 seconds to complete for deposit if approved, QCash allows members, whenever and wherever they are, to quickly access funds that can prevent an overdraft incident that inhibits their economic recovery. 

Overdraft protection programs have contributed a significant amount of net income for America’s financial institutions for over three decades. While some institutions are unsure about giving up that easy yet destructive source of revenue, the potential benefit of an updated, efficient, personalized, and member-oriented substitute may offer an even larger, long-term revenue opportunity for the future health of your credit union.