Most of us have experienced at one time or another that awful feeling when you realize you have either bounced a check or are about to. And most credit unions have “been there” for the member with a courtesy pay feature that tacks an average fee ranging between $27 and $30 on at the end (per item).
Turns out, not so courteous. And financial institutions are beginning to see the light. In June 2021, Ally Bank announced they were eliminating overdraft fees for all their customers. “This is a significant advancement for consumers as we live out our mission — being a true ally,” said Ally CEO Jeffrey Brown. “Overdraft fees are a pain point for many consumers but are particularly onerous for some. It’s time to end them.”
Mr. Brown is correct. If a member finds themselves at a period in their lives where they are in a financially unhealthy position, such irritating and consequential charges do nothing but cause further distress and financial instability rather than “teaching them a lesson.”
While most courtesy pay fees average $27.30, at credit unions, we can boast they are still less than overdraft protection programs at banks, which average around $35.
The challenge with courtesy pay “services” is that 95 percent of those consumers who paid $12.4 billion in overdraft fees in 2020 were listed as “financially-vulnerable,” according to Forbes.
Forty-three percent of at-risk households with checking accounts reported an average of 9.6 overdrafts in 2020. Let’s say a credit union charged an overdraft fee of $24.38 in overdraft fees for every transaction, that means those at-risk households paid almost $234 in overdraft fees that year. That’s money that a family could have used for other products or services that improve their financial inclusion efforts rather than paying overdrafts or courtesy fees.
“Courtesy pay” without the courtesy for the financially-vulnerable
The challenge with courtesy pay “services” is that 95 percent of those consumers who paid $12.4 billion in overdraft fees in 2020 were listed as “financially-vulnerable,” according to Forbes. Courtesy fees essentially serve as a penalty for consumers who spend more than the amount they actually have in their checking account.
A more detailed look into fees in general is that they tend to illustrate the racial inequality in our nation’s financial system itself. A FinHealth report found that Black and Latinx American households inordinately pay more in overdraft or courtesy pay fees than their white counterparts. Black households come in at 1.9 times more, and Latinx 1.4 times than whites. Systemic barriers, structural inequality, and discriminatory practices that disfavor these communities make financial stability and improved financial health much more difficult to achieve.
Often, the transaction is wholly unintentional. “Everyone comes up short sometimes, from a student managing their first bank account to families who lose track of their current balance,” notes UW Credit Union President and CEO Paul Kundert. “Our goal for all members is to help them accumulate wealth, not erode it.”
While these services might help those who are just in a quick pinch, for others it will cascade into more fees and provoke further financial instability. In this last especially stressful year of COVID-19, households that were struggling financially were hit the hardest when paying for these courtesy pay services.
How credit unions can move on from courtesy pay and overdraft fees
The credit union industry is beginning to recognize the threat courtesy pay and the overdraft concept truly is for lower-income or financially-vulnerable individuals. Consumer advocacy groups have been howling about overdraft reform for years.
Senator Cory Booker (D-NJ) has been heading up a years-long effort to renovate overdraft banking regulations. In 2018, the New Jersey senator introduced a bill that would ban overdraft fees on debit and ATM withdrawals while limiting the number of overdraft fees that can be charged per month and year. The eight month-old Biden administration wasted no time in righting the ship of the Consumer Financial Protection Bureau after the Trump administration severely curtailed the original mission of the federal watchdog agency.
So what can credit unions do on the ground, in their community, to provide a safety net for members before an overdraft even occurs? We need to go back to the member. As is often the case with the financially-vulnerable or underbanked, they may have more month than money. Unfortunately, these same members are the first to regularly frequent external payday lenders, often getting exploited in the process with mind-numbing interest rate fees.
That’s why the QCash mobile life event loan platform is a powerful service for your credit union, especially those listed as “Low Income Designated Credit Unions” that feature a high number of low-income households. “My advice to credit unions is if you don’t have small dollar loans, and I mean really small, like under $5,000, then you need to figure that out, said Northwest Credit Union President and CEO, John Iglesias. “I’ve learned so much from this product offering that we’re looking at ways that we can make our other products as efficient as this one.”
The QCash platform is certainly efficient; it only takes six clicks and around 60 seconds to see the approved loan amount show up in the applicant’s checking account. But then it’s also accessible and collaborative. Instead of working against the member’s financial health goals like courtesy pay and overdraft fees, the product works to shield the member from a potential cascade of debilitating fees and financial instability.
The experience is fully-automated with no loan officer necessary, and with the platform’s relational underwriting system, your member will be getting a fuller, more detailed evaluation that considers more than a simple, one-dimensional credit score.
QCash offers credit union members an accessible and affordable financing option for when life happens. When your members are experiencing some of their toughest days, offer them the financial tools that can help them build their lives back better. After all, isn’t that part of what the credit union difference is all about? For more information on QCash life event loan platform, email firstname.lastname@example.org or visit the QCash Financial website.