Jim Griffis, a regional director for John M. Floyd & Associates (JMFA), writes about the importance of keeping pace with changes in overdraft strategies:
There are myriad reasons why organizations fall behind when it comes to updating their products or improving existing services. Regulatory uncertainty, budgetary constraints, insufficient staffing, technology concerns, outdated business philosophies and a fear of the unknown are reasons I often hear from credit union leaders who aren’t satisfied with their existing performance. Yet often they are hesitant to revisit their overdraft program strategy to increase revenue and improve member service.
But maintaining the status quo in an increasingly competitive industry can have far-reaching consequences. And the results may not only negatively impact the credit union’s performance, but also prove detrimental to its workforce and the level of service provided to members.
For instance, while waiting for new regulatory input on overdraft strategies over the past several years, some institutions have allowed their program to become stagnant or have decided to forego implementing a compliant overdraft solution until a final ruling was announced. As a result, many existing programs are most likely outdated which creates increased risk for examiner scrutiny and sub-par results. Both of which can be perilous in regard to reputational and competitive capital.
Following are a few examples of the cost of complacency when it comes to your overdraft strategy:
Failure to meet members’ financial services needs
Let’s face it, if you aren’t offering an overdraft service, your members are going someplace else when they need funds – whether to your competition, a high interest rate short-term loan, a payday lender or something else. Not only is this diminishing your value as their financial institution of choice, someone else is benefitting financially from your members.
A disclosed overdraft program offers consumers an option they can use in the event they need additional funds or make an error in their checkbook. If they don’t use it, they won’t ever be charged a fee. The important thing is, when they do need it, it’s there. And that is the kind of reassurance that many consumers value today.
Non-disclosed programs risk regulatory and legal exposure
The recent release of the Consumer Financial Protection Bureau’s five-year strategic plan hints that more stability may be ahead on the regulatory front. While it does not appear that the Bureau considers any new rulings a priority at this time, credit unions still need to be vigilant in regard to maintaining fully disclosed overdraft procedures.
During the past few years, there has been an uptick in activity related to consumer litigation against financial institutions for using unfair and deceptive practices, such as:
- failing to obtain affirmative opt-in consent from account holders before charging overdraft fees on ATM and electronic transactions;
- utilizing misleading advertising practices that don’t disclose fees;
- re-ordering transaction processing that results in maximizing overdraft charges;
- implementing sales incentives that encourage deceptive product marketing practices; and
- failing to clearly disclose information relative to overdraft processing and procedures.
So, even though it appears that no new overdraft regulations are being considered at this time, failure to properly disclose information to members can lead to substantial risk.
Lack of proper training negatively impacts employee morale and program results
I am often surprised when I have the opportunity to chat with credit union employees about how they present their institution’s overdraft program to members during account openings. If they haven’t been properly trained on the value the program provides when a member is faced with a financial hardship, they are not prepared to explain the program accurately and confidently. Or, they may let personal biases against individual members cloud their willingness to offer the program at all. Such uncertainty can result in frustration for employees who want to provide good service. It can also lead to compliance violations for the credit union if all members are not treated consistently.
Following a recent client training session, I watched as employees walked out of the training room after having that “aha” moment. I could see on their faces that they had gained a new understanding of what an overdraft program means for a member who is dealing with unexpected medical expenses or the loss of employment. They realized the importance of offering products based on what is in the members’ best interest, not their own. They understood the importance of fully disclosing what the program is, how to use it appropriately and how much it costs – so members can decide whether or not it is right for their situation.
Taking advantage of ongoing, professional training opportunities helps to solidify important program aspects that staff members may lack from any previous understanding of how a compliant program works. And role-play opportunities help staff learn how to present the program effectively to members.
Maintaining the status quo can lead to mediocrity
While you may think you are currently earning adequate fee income each month from an existing strategy to stay on your current course, what would an extra 25 to 50 percent in non-interest income each month mean for your credit union? Are there things on your wish list – such as updating technology, initiating facility improvements, hiring new personnel to help grow your loan portfolio or maintain more efficiency in your branches – that you have been putting off because of budgetary constraints? Are there mobile-based services that your members obtain elsewhere because you are stalling on updates or new implementations?
According to information from the Pew Charitable Trust, 12 million Americans take out payday loans each year to cover their financial needs. How many of your members are using competitive resources when they have a shortfall in funds, instead of relying on your credit union to provide a full range of services? Think about the good you can do to better serve your members’ financial needs – while keeping your credit union competitive and top-of-mind in your market.
A commonsense approach to overdraft services reaps the most rewards
A professional overdraft service provider can take a look at your existing program or help you implement a new one. They will make sure the procedures are member-friendly, review your fees to make sure they are fair and advise you how to maintain effective communications policies that provide the information members need to use your program wisely. They can provide an estimate of your earning potential, guide you throughout the implementation process and provide on-going advice to keep your program on-goal. In either case, the resulting revenue stream generated by a well-maintained, fully disclosed overdraft program can support strategic improvements that will enhance member service and keep your credit union competitive for years to come.