Five ways to keep overdraft fees in perspective

When a member overdraws an account, there are rules in place that determine whether or not the item will be paid, and whether or not the member will be charged a fee. Recent noise about fee suspensions and limits has stirred lots of questions regarding the future of short-term liquidity programs like overdraft. I recently sat down with Christopher Leonard, the CEO from our partner Velocity Solutions to get the latest on the topic. Before radically altering your existing overdraft policies and creating a gap in non-interest revenue, take a step back and consider these five points I walked away with:

Overdraft is commonplace. Morning Consult surveyed 2,200 adults in June 2021 on the subject and found that half of all respondents have used overdraft at some point, and 19% had overdrafted in the previous 12 months. That 19% was very evenly divided among all types of financial services customers (credit union members and customers of national, regional, or community banks) as well as gender and income level.

(Formal) complaints about overdraft are not commonplace. In a recent whitepaper “Overdraft Changes Bring a New Competitive Landscape”, Velocity Solutions analyzed all Consumer Financial Protection Bureau (CFPB) complaints in 2020 and found that even casting a wide net, only 0.23% of reported issues were connected to overdraft fees or problems caused by low funds.

Let’s be precise when we discuss overdraft fees. As insiders, we understand the difference between an overdraft fee (charged when the item is paid) and a non-sufficient funds (NSF) fee (charged when the item is rejected). Velocity’s whitepaper points out that mainstream media and consumers tend to get confused over this terminology. A combination of fuzzy language and marketing hype from big banks has mischaracterized a growing trend to eliminate NSF fees (which has happened now at half of the nation’s top 20 banks) as a trend to eliminate overdraft fees. The outcomes as well as the risks associated with overdraft and NSF are very different. Credit union professionals should stay focused on clear and precise language and offer member education when messaging about these two different types of fees.

(CFPB provides a chart of these developments across the top 20 banks.)

Credit union members consider overdraft fees fair. The same Morning Consult survey revealed that a majority of credit union members considered overdraft fees overall to be a fair charge for convenience, rather than an unfair penalty. Notably, this showed stronger customer support for the practice of overdraft fees than customers of national banks (evenly split on the subject of fairness) and customers of community and regional banks (a majority of whom consider overdraft fees unfair.)

Most members aren’t keenly watching the question of overdraft fees and waivers. Morning Consult also asked respondents whether their primary financial institution waived overdraft fees as part of COVID-19 response. Most credit union members (55%) answered that they didn’t know or had no opinion, and the same share of the total respondent pool gave the same answer.

For a deeper discussion of overdraft management options, read Velocity’s recent publication, “Overdraft Isn’t Over.”