Forums Provide a Balanced Perspective on Policies and Procedures of Consumer-Friendly Overdraft Programs
October 11, 2012
October 11, 2012
In the last issue of The Floyd Report, we announced our efforts, in conjunction with Washington D.C.-based Morrison Foerster LLP, to provide the Consumer Financial Protection Bureau (CFPB) with a balanced look at how transparent overdraft programs can benefit informed account holders. Through a series of overdraft policy information forums and surveys, we conducted an in-depth review of how more than 50 credit unions and banks manage their overdraft privilege services.
Based on the responses we received from these institutions, many of which are located in rural areas, we have identified details related to patterns of overdraft use and how account holders are affected by practices and factors that the CFPB has identified as concerning.
In this first report of our two-part series, we will focus on information we received regarding:
- the patterns of overdraft program use;
- posting order that increases consumer costs; and
- opt-in rates based on misleading statements and excessive pressure.
Who are overdraft users?
First of all, there appear to be two distinct patterns of overdraft use: consumers who use the program occasionally—and in many cases inadvertently—and those who regularly rely on overdrafts to meet their near-term liquidity needs.
Occasional users generally do not plan to incur overdrafts. Many do so because they have not kept track of their account balances or have made mistakes reconciling their account. Or, they intentionally overdraw their account in order to make payments that they consider important and that they expect to cover with a deposit in the near future.
Because they do not incur frequent overdrafts, this group is less likely to understand their financial institution’s overdraft practices. This includes some individuals who have incurred significant overdraft fees for debit card and ATM transactions because they were relying on their financial institution to reject these transactions if they would lead to an overdraft. This group represents only about 15 percent of the overdrafts incurred at credit unions and banks using Overdraft Privilege.
On the other hand, consumers who regularly overdraw their accounts incur about 85 percent of the overdrafts at financial institutions using Overdraft Privilege. These account holders do not appear to have a liquidity cushion to rely on and need liquidity in the form of overdrafts to manage their expenses on a regular basis. These overdraft program users often have low or moderate incomes, but regular overdraft use is by no means limited to low or moderate income consumers. These account holders generally have a clear understanding of overdraft services and the associated costs, and appear to choose to incur overdrafts rather than use other alternatives—such as deferring the payment of bills or the use of payday loans to manage their cash flows—based on convenience, cost and, in some cases, effect on their credit history.
All of the institutions participating in our study indicated that they have policies and procedures specifically designed to manage the risk associated with excessive overdraft use. Most of the respondents regularly counsel account holders about how to avoid overdraft fees. However, many explained that account holders are often offended by such outreach efforts and indicate that they are aware of the costs associated with using overdraft services.
Transaction Posting Order
Ninety-six percent of the institutions we spoke to use low-to-high, sequential or chronological transaction posting. Respondents noted that sequential posting was generally easy for account holders to understand. Posting order appears to have minimal effect on the number of overdrafts incurred by regular “overdrafters” as they tend to continue to conduct transactions after their account funds have been depleted. So, the order of posting would only affect the first or second of several overdrafts.
Contrary to reports by consumer groups and the media, we did not find that participating institutions intentionally manipulated the transaction posting order to increase revenue. Several institutions explained that in recent years they had switched from using a high-to-low posting order to a low-to-high order and saw an insignificant impact on total revenue and customer usage of overdraft services.
The 3.8 percent of participating institutions that reported using a high-to-low posting order indicated that they believed these policies were account holder driven – due to a preference to have transactions consisting of larger amounts, such as mortgage or car payments, paid before checks of smaller amounts. The ability to revise posting order policies to meet account holder needs is important to smaller institutions.
Overdraft Program Opt-in Rates
In response to the CFPB inquiry into whether institutions use unfair or deceptive tactics to obtain overdraft program opt-ins, we questioned participating institutions about their policies and, in some cases, reviewed their opt-in materials. The respondents indicated that the average number of accounts that opted in for ATM and POS debit card transactions varies from as low as three percent to as high as 93 percent, with an average of 24 percent. Moreover, participant responses indicated that the number of opt ins revoked was on the order of a relatively low eight percent. Our review of some institutions’ account holder materials with high opt-in rates did not identify any statements or practices that appeared to be misleading.
Virtually all of the institutions interviewed indicated that they provide account holders with the choice to opt in to overdraft services for ATM and debit transactions and to opt out of the service for check and ACH transactions. The number of opt outs for check and ACH transactions is also low – at three percent. We believe this reinforces the view that account holders incurring overdraft fees are doing so voluntarily.
In the next issue of The Floyd Report, we will cover responses regarding:
- disproportionate impact on low-income and young consumers;
- alternative services; and
- high-use accounts.
Strategic Link is the NWCUA’s wholly-owned service corporation, providing the Association’s member credit unions with exclusive high-quality, competitively-priced products and discounted services. To learn more about how the Association’s partnership with John M. Floyd & Associates can benefit your credit union, contact Sales and Marketing Associate Craig Reed: 206.340.4789, firstname.lastname@example.org.