Navigating Overdraft Fee Reduction With Confidence
Six essential tips for adapting to regulatory changes and enhancing member value
By Cheryl Lawson, EVP-Compliance Review, ADVANTAGE
September 9, 2024
Regulators have increasingly sharpened their focus on overdraft programs, pushing financial institutions to provide transparent and responsible overdraft services. Despite good intentions, not all overdraft programs align with standards designed to minimize consumer harm, a concern that must be addressed seriously. Over the past year, regulators have been outspoken about eliminating problematic overdraft practices, underscoring that overdrafts remain a top supervisory priority. As a result, some credit unions made drastic changes that missed the mark in prioritizing member value.
For those approaching this with caution, there’s an opportunity to make meaningful adjustments that will deliver long-term benefits. As consumer needs for overdraft services persist, the product itself — driven by advances in payment technology, shifting expectations, and increased market competition — is evolving. Additionally, compliance pressures and litigation risks highlight the need for thoughtful adaptation and a critical reassessment of how overdraft programs are structured.
Rethinking Fee Structures to Reduce Consumer Harm
According to a CFPB report, banks collected approximately $5.8 billion in overdraft and NSF fees in 2023, approximately $1.8 billion lower than in 2022, reflecting a 24% decrease. While the data is not representative of all financial institutions, the bureau emphasized that some of the nation’s largest banks have reported decreases in overdraft/NSF revenue. This shift suggests an awareness of the need to better align with consumer needs and mitigate reputational risks.
The national average overdraft fee is around $35 per incident, with some financial institutions charging additional continuous overdraft fees, which can add up to $100 or more over a few days. While reducing the overdraft fee amount may seem like a straightforward solution, it’s only one element of a comprehensive strategy. To truly offer members value, credit unions should ensure that their overdraft programs include features that minimize harm and offer genuine support. Considerations might include allowing transfers from savings or credit lines, setting caps on daily fees, providing a grace period, and establishing a negative balance threshold. Aligning fee amounts with market standards and structuring programs to prioritize service are also essential steps.
Creating a Member-First Overdraft Service
Beyond the fee, it’s important to address the other aspects that affect the member experience. Establishing reasonable fees, clearly disclosing program details, reducing back-end charges from merchants, and positioning the service as a supportive resource rather than a penalty is crucial.
It’s about offering a solution that truly serves your members.
Tips for Re-Evaluating Overdraft Practices
- Review and Update Fee Disclosures: Ensure all fees are transparent and consistent across all account holder communications.
- Train Staff: Conduct regular training to ensure frontline staff understand and communicate the program effectively.
- Enhance Processes and Procedures: Perform a comprehensive evaluation and implement substantive changes prioritizing the member experience.
- Analyze Fee Structures: Understand how your program is being used and analyze market data to determine appropriate fee structures.
- Leverage Technology: Evaluate technology providers to ensure systems provide accurate reporting and functions that meet regulatory requirements.
- Engage with Regulators: Maintain open lines of communication with regulators and seek guidance as needed.
By following these steps, credit unions can build a compliant overdraft service that withstands regulatory scrutiny and supports business goals.
With regulators reaffirming their stance on overdraft fees, it is important to align with new regulatory standards to reduce consumer costs. Re-evaluating procedures, including fee amounts, and adopting consumer-friendly practices can help with avoiding examiner criticism, building member trust and fostering long-term relationships.
For assistance and personalized guidance, the ADVANTAGE team is ready to help you navigate these challenges and ensure your overdraft protection program remains compliant while delivering value to members.
Contact ADVANTAGE to learn more about how to receive a complimentary risk assessment.
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.