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I have been reading with interest (and some discomfort) the recent news reports bashing the overdraft services that some banks have in place. As an economist for banks and credit unions who also provides overdraft services, I am obviously concerned, but not for the reasons you may assume. I, in fact, agree with the consumer groups who have brought this issue to light. Financial institutions need clear guidelines on how to implement honorable overdraft services so they are a benefit for consumers, as well as an income producer for the institution. And consumers need to have the opportunity to choose whether or not to participate. My real concern is that credit unions and community banks-with their high-profile consumer orientation-will shy away from providing overdraft services because they are afraid of the bad press and what their members might think. But they shouldn’t be. Overdraft services are truly consumer services. And in these times of uncertainty, when dishonesty and skepticism litter the business landscape, people need all the help they can get, particularly from partners and providers they can trust. Overdraft services were first offered by local banks as a special service to valued customers in the late 1950′s. Credit unions began offering checking accounts in the early 1970′s, and some began allowing for overdrafts. Federal credit unions received formal authority to provide overdraft services in July, 2000 when the NCUA amended part 701. (Interestingly, banks still do not have authority from any of their regulators to do overdrafts, but must rely on the results of more than 128 court cases for guidance.) Even with NCUA approval, credit unions were reluctant to offer overdraft service for fear of loss, and because of the pervasive opinion that good members should always reconcile their accounts every month. But the tides have changed. Today, 63% of all credit unions allow at least occasional overdrafts by their members.* The reason overdraft services were developed years ago, and the reason overdraft services are still viable today, is because they fill a consumer need. Only 13% of people balance their checkbooks regularly, so people make mistakes. And that’s all an overdraft is – a mistake. As long as people continue to make mistakes, which they will, financial institutions will have an opportunity to show their good will by honoring those checks that are consumer mistakes. How do you make sure that the program you have in place is honorable? Ask yourself these questions: Are the overdraft fees you charge reasonable? Do the limits you have set meet the needs of your members? Can the program stand alone, without relying on enticement programs such as free checking to boost income? Are consumers provided with the option to refuse the service and avoid the corresponding fee? Let’s examine each question briefly. Are the overdraft fees you charge reasonable? Today, the national median overdraft fee charged by a credit union is $20, and the national median charged by a bank is $22.88.* I believe these fees are too high. I believe that credit unions, because they are member owned, should charge less than the national median of $20. But statistics show that some credit unions are becoming almost as greedy as their big bank partners, and are steadily increasing overdraft fees. In 2001, the average fee charged by a credit union was $15; in 2002, the average was $20. Will it continue to go up? Presumably, and then credit unions will be included in the same controversy that is now consuming the big banks. Credit unions may argue that they need to raise the price of overdrafts to generate more fee income, but that premise is statistically incorrect. Our statistics have shown that credit unions can actually increase their annual fee income by more than 100% by lowering their overdraft fees below the national median. After all, fee income is derived from price times volume, not just price alone. With lower overdraft fees, the consumer wins, and the credit union wins too. Do the limits you have set meet the needs of your members? The purpose of an overdraft service is to honor members’ checks when they have made a mistake. Doesn’t it make sense, then, to honor the most important checks a member might need you to honor, such as a mortgage or car payment? Most credit unions (and banks especially) set limits too low, at $300 to $500, so that the results are a few overdrawn checks, lots of fees, and many unhappy consumers. When setting limits, meeting members’ needs should be the first priority. Limits should be in the range of $1,000 to $3,000 to cover the mortgage payment and car payments in case the consumer makes a mistake. Simply setting limits based on an account holder’s deposit activity is a payday loan gimmick that discredits the provider. Overdraft services are deposit services, not loans. Consumers deserve more than gimmicks. Can your overdraft service stand alone and still be viable? I’m not suggesting that credit unions stop offering free checking, which more than 70% of them do today. But I am advocating the position that free checking should never be used as an enticement to get people in the door simply to make money on overdraft fees. That’s putting an awkward, self-serving twist on what should be a member service, and I don’t think any reputable credit union would want to do that. An overdraft service should be able to satisfy member needs without free checking. Are consumers provided with the option to avoid the service and the corresponding fee? Institutions need to be clear in their communication to consumers about what is provided, and they need to give consumers options to avoid an overdraft – options such as the ability to transfer money quickly and easily, or to enroll in a line of credit that would cover overdrafts. Consumers have no problem paying fees when they are given options to avoid them. And of course, the ultimate expression of participation is the ability to opt out. I hope that credit unions take these words to heart, and do the right thing by their members by offering honorable overdraft services. “Not for profit, not for charity, but for service” is a credit union motto that I’ve heard many times through the years, and it never fails to impress me. Organized to serve, credit unions provide a safe haven for people – a trustworthy place to save, borrow and manage their money at reasonable prices. And today, more than ever, we all need safe havens. Let’s do the right thing by your members, and honor them with honorable overdraft services. *Source: All fee and product use statistics come from the Annual Report to the Congress on Retail Fees and Services, commissioned by the Federal Reserve every year for the past 14 years, compiled with data from Moebs $ervices, Inc.

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