This article was written by John M. Floyd (pictured at right), chairman and CEO of John M. Floyd & Associates (JMFA). JMFA is a leading provider of profitability and performance-improvement consulting.
Changes in regulatory requirements over the past few years regarding financial services and products have had a significant impact on overdraft programs for all financial institutions. Now, most overdraft programs are outdated and obsolete. As regulators and consumer groups continue to focus on the expectations of transparency and full disclosure when it comes to consumer products, offering an overdraft program that is not up-to-date can have a strong impact on a credit union’s compliance, and ultimately, revenue.
Now is the time to re-evaluate the overall effectiveness of your overdraft program – from a compliance standpoint – as well as how it affects member service and performance.
Helping members maintain financial stability
As some consumers continue to experience difficult economic situations, many rely on their financial institution’s overdraft program to help them to make ends meet. According to a survey released by Bankrate.com, nearly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings. Fewer than one in four surveyed had enough of a cushion to cover unexpected medical costs or other needs. Going into the end-of-year holiday season can make this situation even more precarious for some as impulse buying and unexpected expenditures can lead to account shortfalls.
When having access to a reliable overdraft service translates into the ability to pay one’s mortgage or rent on time, or cover the cost of unforeseen expenses and essential services, it can make a tremendous difference in a person’s life. And while some may view the frequent tendency to overdraw a checking account as a lack of financial sophistication or even lack of judgment, it is important to remember that without safe, basic financial services, many consumers are forced to turn to more costly, often unregulated sources for cashing checks and paying their bills.
Full disclosure supports responsible use
Whether a member only uses overdraft services occasionally or on a more regular basis to meet his or her near-term liquidity needs, providing all account holders with easy-to-understand information about how your overdraft program works, the costs associated with its use and the importance of returning an account to a positive balance is essential.
A fully-disclosed overdraft program clearly defines the rules by which an account holder may access an overdraft service and establishes a straightforward approach of responsible use. As a result, account holders have a reliable tool for maintaining control of their money.
Moreover, a consumer-focused, disclosed program offers overdraft limits that are set with the account holder’s full knowledge. When necessary, the limit can be adjusted, eliminated or re-instated, depending on the situation. As long as an account holder is in good standing, an overdraft will be paid to that established limit.
As a result, an informed member can avoid the extra expense of merchant fees and penalties for a returned check, not have to worry that ATM or debit card transactions might be declined and rest assured that important purchases will be paid in the event of a financial shortfall.
To further demonstrate your efforts to promote responsible program use, make sure you have the policies, procedures and communications materials in place to educate your members about the importance of returning their account to a positive balance within a specified timeframe. In addition to these formal policies, have a plan for counseling regular overdraft program users about how to avoid overdrafts, and provide advice on how to balance their account and establish a budget. When necessary, offer information on alternative strategies that might be better suited for their needs.
Transaction posting order matters
In the past several years, nearly all of the criticisms on overdraft programs – as well as reported fines and legal action – have focused on institutions that offer programs with dynamic overdraft limits or those that manipulate transaction processing order to increase overdraft fee income.
Because dynamic overdraft limits are set using a complicated, ever-changing criteria-based matrix, it is impossible for a member to know his or her limit from day to day. Or, for that matter whether or not an overdraft will be paid. Posting checks, ATM and debit card transactions in non-neutral order can cause financial hardship for members who may already be facing a difficult economic situation.
From a regulatory standpoint, these undisclosed procedures are discriminatory and will most likely result in increased scrutiny during a compliance exam or, in a worst-case scenario, result in fines and legal action.
Compliance doesn’t happen by accident
In today’s reality, transparent financial products and services are expected. To eliminate the risks of being out of compliance, make sure your overdraft program adheres to all consumer-focused regulations and industry standards for best practices, and provides the following:
If you’re not sure that your current overdraft program is getting the best results for your credit union and its members, it may be time to undergo a review of your program to identify any adjustments that need to be made to get it back on track.
Attention to the details results in a “win-win” for your credit union and your members
As stringent regulatory expectations continue for the financial services industry, it is imperative to stay current with the processes and procedures required to maintain a fully compliant overdraft program. At the same time, by monitoring your program to ensure that it is meeting the needs of your members and providing your credit union with the revenue necessary to meet your performance goals, you can increase its overall value.
In today’s environment, setting up an overdraft program that runs on auto-pilot, without any type of monitoring, can put your credit union at risk for compliance issues, lost revenue and fewer satisfied members.