By: Kari Anne Arnosk, Principal, Debit Consulting, Advisors Plus, PSCU 

Over the past year, significant changes to eliminate or modify overdraft (OD) and non-sufficient funds (NSF) fees were implemented by the largest financial institutions in the U.S., quickly transforming the competitive landscape. Fourteen of the top 20 banks eliminated NSF fees (including Bank of America, Citigroup, Fifth Third, PNC, Truist, U.S. Bank and Wells Fargo), with three more planning to do so by the end of this year (Citizens, KeyBank and TD Bank). Many also reduced their overdraft fee — across the industry, the average cost of an overdraft fell by 11% to $29.80 from last year's high of $33.58 — as well as added “buffers” that allow consumers a small amount of overdraft at no charge. 

Financial results attest to the significance of these changes by the large banks, where OD/NSF fees revenues declined 24% on average from Q1 of 2019 to Q1 of 2022, while smaller financial institutions declined only 5% on average over the same timeframe. Lack of follow-through by the smaller financial institutions is noteworthy for the Consumer Financial Protection Bureau (CFPB) and may serve as warning for these institutions to take action now regarding their overdraft program policy and procedures. 

As many financial institutions have aggressively made changes to their overdraft programs, the pressure for credit unions to do so is also increasing. Credit unions that have not made changes to their overdraft programs need to understand the regulatory, market and reputation risk factors of not proactively addressing this industry-changing movement. More importantly, members need their credit union to help them avoid fees related to overdrafts and provide alternatives to strengthen their financial health. 

Background  
Rohit Chopra, Director of the CFPB, has led the agency with a professed focus on the best interests of the American consumer. Upon his confirmation in October 2021, the CFPB quickly released a research report examining overdrafts and the “abusive” practices of depository institutions. The report findings identified “a clear market failure.” As a result, Chopra committed to deep scrutiny of overdraft fees and practices, starting with larger financial institutions. Smaller financial institutions will likely be next. 

In early 2022, National Credit Union Administration (NCUA) Chairman Todd M. Harper challenged credit unions to “identify additional ways to lower and eliminate overdraft fees.” The NCUA is currently reviewing credit union overdraft program policies and procedures, as well as communications with members. The NCUA will use this information for a more thorough review in 2023. 

Why should credit unions act now? 
Credit unions need to weigh the regulatory, market and reputation risk factors of not adjusting their OD/NSF programs against the risk of less income from fees. The CFPB and regulators are pushing for financial institutions to provide financial products that are fair, transparent and competitive. Larger banks have been moving at a faster rate in making changes to their OD programs than smaller banks and credit unions. It seems like the CFPB is pleased to see these changes – which means they will likely expect them to trickle down to the smaller banks and credit unions. 

Risks of Inaction 
Credit unions who do not take action to reduce their OD fees and NSF fees will face both market and reputational risks in an increasingly competitive financial services industry. 

Credit unions are at risk of losing market share if they do not invest in making changes to their overdraft and checking account programs. Overdraft-friendly features are an expected benefit of the checking account package – and a strong competitive advantage for both customer acquisition and retention. Challenger banks are leading the way and big banks have become fast followers, leaving the majority of credit unions behind. A 2021 report from Curinos revealed that financial institutions making changes to their programs experienced a 40% increase in account acquisition since 2017, while those that did not experienced nearly a 30% reduction in customer acquisition. 

From a reputational standpoint, credit unions were founded on the premise of “people helping people” and providing an equitable banking experience for their members. For some members, that may mean assistance from paycheck to paycheck. It is essential for credit unions to update their overdraft programs and associated products and services to sustain growth and remain relevant to serving the financial well-being of their members. The competitive marketplace, combined with pressure from lawmakers and regulators, continues to drive change. Michael Hsu, Acting Comptroller of the Currency for the Office of the Comptroller of the Currency (OCC), has been urging banks to reconsider their overdraft products, saying, “You don’t want to be the last bank that still has a traditional overdraft program.” This warning applies to credit unions as well. 

Ways to Take Action 
Identify opportunities that deliver value, help your members avoid overdrafts and sustain long-term growth. While some changes may have financial impacts, the key is to understand how to pace your credit union through these changes and identify opportunities that will offset these effects. Ways to take action include:

• Understand your competitive position in your marketplace
   
• Review your OD/NSF Fee program to understand which fees to eliminate or modify
   
• Evaluate and rebrand your Overdraft Program to enhance member financial wellness
   
• Identify checking product opportunities to help members avoid overdrafts
   
• Redesign checking solutions to encourage member engagement
   
• Identify new product solutions that enable members to manage short term cash needs

While big banks and larger financial institutions have led the charge to make changes to their OD and NSF fees, it is not too late for smaller financial institutions and credit unions to take action. Need help evaluating your OD program? Consider partnering with a fintech credit union service organization (CUSO) like PSCU or another partner to help. By eliminating or significantly modifying their OD/NSF fees strategy, credit unions will not only stay competitive, but provide an additional way to help their members on their financial wellness journey. 

Kari Anne Arnosk is a Principal Consultant with Advisors Plus with over 30 years of experience in the financial services industry. She works with clients to create the most effective strategies for maximizing their checking and debit card portfolio growth.