Amid all the talk about additional oversight of overdraft practices, the case for a fully disclosed, consumer-focused overdraft solution has never been more urgent.

In February, the NCUA announced its supervisory priorities for 2024, signaling an intensified scrutiny of overdraft and non-sufficient fund (NSF) fees. While the threshold for such focus had been credit unions over $500 million in assets in 2023, NCUA Chairman Todd Harper announced that the threshold includes all credit unions above $100 million in assets.

The stakes are higher than ever as examiners expand their evaluation to include reasonable and proportional overdraft fees, re-presentment, and authorize positive/settle negative (APSN). Moreover, Harper cautioned the industry that credit unions that rely too heavily on overdraft income will need to change their business model.

Between the CFPB’s proposed rule to “update regulatory exceptions for overdraft credit” and the NCUA’s emphasis on eliminating problematic overdraft program practices, re-evaluating your overdraft strategy is a necessity. Remaining proactive to align market demands and regulatory expectations is paramount for sustainable growth.

A consumer-friendly overdraft service starts with carefully reviewing the program through the lens of your members. It’s about prioritizing transparent communication, including limits and fees.

Critics of overdraft services overlook the modern solutions and pro-consumer policies adopted by many credit unions. Evolving best practices and clearly disclosed programs that are upfront about how the service works, including details about limits and fees, are the key to putting your members first.

In fact, consumers have a need and are willing to pay for the service. A national survey conducted by Morning Consult found that:

• 88% of consumers found overdraft protection valuable.
• 77% of consumers who paid an overdraft fee in the past year were glad their payment was covered rather than being returned or declined.
• 63% percent of consumers think it’s reasonable to be charged a fee for an overdraft.

As industry leaders and policymakers deliberate on the future of overdrafts, acknowledging these realities becomes imperative.

Implementing a proactive overdraft strategy should align with offering a valuable, better service.

When evaluating your overdraft strategy, important areas to consider include: 

1. Reducing consumer costs: Demonstrating meaningful changes to your consumers is crucial. For instance, implementing a grace period and evaluating your fee are two ways to tackle fairness and reasonable fee structure issues. If you have the technological capabilities, employing strategies like low balance alerts and early direct deposit can lower costs for your members. Of course, understanding the impact of reactively making changes can be daunting ¾ ensuring you have the right tools and expertise is paramount.
2. Mitigating institutional risk: You can pull a few levers to ensure the stability and resilience of your credit union. Reviewing disclosures, policies, and procedures for APSN transactions and re-presented items are significant areas that require time and resources. Moreover, implementing robust risk management frameworks, conducting regular assessments of internal processes, and staying abreast of evolving regulatory requirements must be on your radar. By proactively identifying and mitigating potential risks, you can safeguard your credit union’s operations and maintain trust among stakeholders. Often, the challenge is knowing where to look and having the right plan in place.
3. Minimizing examination risk: Maintaining accurate records, implementing better internal controls, and prioritizing transparency are key factors to reducing scrutiny. By proactively evaluating potential areas of concern and demonstrating a commitment to compliance, you can streamline the examination processes and reduce risks. Additionally, having the right resources in place, including a compliance guarantee, eliminates concerns for many credit unions.

Avoid taking a wait-and-see approach—show your members you are in their corner.

Redefining your credit union’s overdraft strategy will ensure you can deliver on your mission to promote financial health and well-being. These are among the best practices that can help you provide a responsible overdraft service that members can rely on.

When you put overdraft best practices into motion today, you are planting the seeds of trust that can grow into stronger loyalty through all stages of members’ financial lives.

To learn more about a pro-consumer review of your overdraft program, visit advantage-fi.com to get started.

JOHN COHRON serves as the CEO at ADVANTAGE. With more than 20 years of experience managing consulting operations and technology development, he is a forward-thinking leader passionate about driving innovation and growth for credit unions to strengthen their competitive position.

ADVANTAGE is a strategic alliance provider for CUNA Strategic Services.