Banks and credit unions have been charging overdraft fees for decades. Recently, many financial institutions have scaled back or eradicated the practice entirely. And many more institutions are poised to do the same. Facing harsh criticism from generations of banking members, it seems the era of overdraft fees is ending.
Since these fees often prey on the financially unstable and other demographics near the poverty line, credit unions and banks are removing overdraft fees in order to evoke trust and entice prospective members and clients to bank with them. Here’s what you need to know.
The Overdraft Fee Rules Have Changed
One big change in the overdraft fee argument is the implementation of Regulation E of the Electronic Fund Transfer Act (EFTA).
In 2009, The Federal Reserve Board made an amendment to Regulation E.
The amendment prohibits institutions (financial or otherwise) from charging “overdraft fees for ATM and one-time debit card transactions unless the consumer opts in or affirmatively consents to the institutions’ overdraft services.”
While this helps limit predatory banking practices, many believe there is still more room to be made for transparency in banking fees and charges.
In the last few years, many banks and financial institutions have reduced or removed their overdraft fees and other penalty-based revenue programs.
In an article from the Regulatory Review, and according to the Consumer Financial Protection Bureau (CFPB), 80% of revenue from overdraft fees comes from less than 10% of banking members. That means this small number of members is charged overdraft fees 10 or more times every year.
Thanks to initiatives and awareness being spread around this topic, more and more savvy bank and credit union members are opting to have their financial institution simply decline any charge that puts their accounts in overdraft status.
The Effect of Ousting the Overdraft
In a report about non-interest income, the Filene Research Institute found that revenue created by overdraft programs and overdraft protection services is shrinking. This is due to increasing regulatory pressures and evolving consumer expectations, as well as the financial industry’s struggle to maintain a wholesome reputation in light of these practices.
Predatory banking is turning members and potential members off. Members see them as indicators that a credit union or bank is looking to profit off financially vulnerable individuals in their communities.
Regulation and reputation are powerful tools. They can turn the tide against something that was once considered a staple of the banking business.
But as we’ve seen before, a reputation problem for big banks is often what makes credit unions so powerful today. Smaller institutions, and especially credit unions, have been providing financial literacy resources and education to their members since inception.
Many big banks can direct prospects’ attention away from these topics by flashing shiny new technology. However, there are credit union partners like IMSI looking to support reputable credit unions by providing them with the best in web development, industry expertise, and superior customer service.
Moving Your Credit Union Forward
Historically, overdraft fees incurred from big banks were much higher than credit union fees. But that trend is changing. Now, most overdraft fees – whether from a big bank or a local credit union – are about the same price.
Many financial institutions are creating new, less predatory practices to replace the overdraft system. Many are creating “low balance alerts.” These and other preventative protocols warn credit union members that they are approaching the limit of their account’s funds.
There are also the many products and services credit unions already offer to help those living paycheck to paycheck find ways to improve their financial situation over time.
Community outreach and financial education are great tools that can be more heavily marketed to replace the declining revenue that was collected from overdrawn accounts.
It’s true that everything has its season, and it looks like the season of overdraft fees is ending. Overdraft fees started in the 1990s but look to be on their way out.
Make a Statement at Your CU with IMSI
Make a Statement is not just a catchphrase – it’s a valuable service that IMSI provides to credit unions around the country. Our Make a Statement tool creates portable print and electronic documents delivered electronically and integrated behind Internet banking.
Similarly, Online Courtesy Pay+ is your online solution for electronic enrollment. It is fully integrated with your core systems. Online Courtesy Pay+ handles regulation-required member notifications like opt-ins and other Regulation E-affected processes.
Check out our website for more information, or contact us today if you have questions.
