Navigating Regulatory Shifts With a Member-First Overdraft Strategy

By John Cohron, CEO, ADVANTAGE

December 5, 2024

Balancing consumer protection with sustainable revenue models has become a core challenge for credit unions. For some, the pending rule from the Consumer Financial Protection Bureau (CFPB), the future of overdrafts remains hazy. From concerns about fee reductions to evolving consumer expectations, credit unions are asking important questions:

• Are overdraft fees going away?
• Are overdraft fees considered junk fees?
• Will lowering our overdraft fee significantly impact revenue?
• Do consumers see the value in overdraft protection programs?

These are all valid concerns, especially as we await the CFPB’s next steps. For many credit unions, this regulatory moment is the ideal opportunity to refine their overdraft strategy with a member-first focus that aligns with shifting regulator expectations.

Are Overdraft Fees Going Away?

While overdraft fees are not disappearing, regulators are increasingly focused on fairness and responsible practices.

Regulatory scrutiny of overdraft programs has intensified, aiming to eliminate harmful practices, including excessive fees. Yet one issue often goes unaddressed: many consumers have urgent cash flow needs that responsibly managed overdraft or courtesy pay programs can fulfill.

A study by MarketWatch Guides found that 48% of Americans feel financially strained, and 66.2% are living paycheck to paycheck. Short-term support is essential for many, which is why overdraft programs remain relevant. However, credit unions can take meaningful steps to make these programs more member-friendly by:

·       Capping total daily fee charges to limit financial strain

• Implementing grace periods that allow flexibility
• Offer clear and transparent disclosures, explaining limits and all potential options
• Reducing or eliminating excessive fees

By proactively adapting their programs, credit unions can balance member support with compliance and value.

Are Overdraft Fees Considered “Junk” Fees?

In recent years, “junk fees” have become a focal point in discussions about consumer protection, with banking fees often swept into this category. These fees are typically defined as excessive, unexpected fees that provide no meaningful service and are not subject to normal competitive forces. While fees – whether for airlines, resorts, or banking services – are unpopular, consumers tend to feel much differently when they understand the purpose behind the charge and recognize its value.

The term “junk fee” has become a catch-all for any fee consumers dislike, but not all fees are created equal. Ensuring fees are fair, transparent, and genuinely beneficial to consumers is essential. Credit unions should evaluate their fee structures and ask: Does this fee provide a clear benefit, or is it primarily revenue-driven? Transparent and anticipated fees – much like a charge for transfers or wires – are well-received when communicated clearly and tied to a specific service.

Will Lowering Our Overdraft Fee Significantly Impact Non-Interest Income?

Non-interest income loss is a significant concern for all credit unions striving to balance member support with financial performance. However, adjusting overdraft fees doesn’t necessarily mean sacrificing income if approached strategically.

By evaluating program utilization data, competitive benchmarks, and market conditions, credit unions can adapt fee structures to align with consumer expectations while remaining sustainable. When revisiting fee strategies, be sure to consider:

• Is the fee itself necessary?
• Is the fee amount appropriate?
• Does the fee align with both member expectations and institutional goals?
• What is the financial impact of adjusting the fee amount?

A proactive approach ensures that fee adjustments feel like improvements to the member experience rather than reactive responses to regulatory pressure.

Do Members Want or Need Overdraft Protection?

We work with clients who’ve seen higher engagement when members fully understand the benefits and how it works.

Before refining an overdraft strategy, it’s essential to ask, “Does our overdraft program add value?” Members’ financial needs are clear, with numerous reports highlighting the pressures consumers face across all income levels and demographics, representing a critical need.

Credit unions are uniquely positioned to offer a reliable resource for managing unexpected expenses. By providing a consumer-friendly program that meets diverse member needs, credit unions can better serve their communities and prevent members from seeking usurious solutions elsewhere.

Moving Forward

As the CFPB continues to shape how overdraft programs are structured, credit unions that adopt a member-first mentality will be better positioned to thrive. It’s not a question of whether overdraft fees will disappear but how credit unions can support consumers while maintaining financial viability.

By building thoughtful fee structures, promoting transparent policies, and meeting consumer needs, credit unions can lead the industry in responsible overdraft services – setting a standard of how to offer valuable financial solutions in an evolving regulatory era.

Learn more in our webinar, “A Consumer-First Approach to Overdrafts,” for more tips on future-proofing your overdraft strategy.

About ADVANTAGE

ADVANTAGE, powered by JMFA, is dedicated to empowering financial institutions with strategic solutions for growth and success. Our comprehensive services include overdraft program consulting and compliance, checking account acquisition strategies, contract negotiation expertise, and consulting for technology strategy, evaluation and selection. With a rich history of serving credit unions nationwide, we are committed to delivering exceptional value and fostering long-lasting partnerships. Choose ADVANTAGE, to elevate your performance, identify new opportunities, and build more value.