Call it what you will. A service, a punishment or financial illiteracy. There is one thing that overdraft program debaters agreed on. Member usage of such programs should be monitored and controlled.
Strunk and Associates LP, a financial institution advisory service that provides an overdraft privilege service program to banks and credit unions, said that the recent negative articles on overdraft programs paint all banks and credit unions with the same brush.
“We’ve seen the articles that reference the $35 cup of coffee, but there are a lot of questions being left out. We have nearly 2,000 clients, and we wouldn’t be in business if these programs weren’t received with open arms,” said Marc Paine, executive vice president at Strunk.
Paine said the key to doing overdraft programs right is to have an opt-out option from the beginning and full disclosure to members.
“This program has never been a hidden service with us. It has always been upfront and fully disclosed. It’s a shame that what is happening for a few is causing us all to get hit with the ugly stick.”
Paine said that Strunk’s overdraft program provides a predetermined set limit for how negative an account is allowed to go. Strunk educates every staff member at the firm’s credit union clients and sends out letters and newsletters and also posts the information in lobbies so members are aware of the program’s details.
“What separates us from those getting attacked is that we strongly promote educating both staff and members. It’s a big part of the program.”
Franklin First Federal Credit Union in Greenfield, Mass., implemented Strunk’s overdraft program in 2006 because it wanted to offer the service to members, CEO Martha Richardson said.
“We didn’t go into it lightly. We were concerned about the same issues Congress is discussing now, but we wanted to save members the embarrassment. And it cost less for them in the long run than bounced check fees.”
Richardson said that Franklin First is careful not to use overdraft as a loan program, which separates the credit union from banks in her opinion. The credit union monitors accounts so if members are using it continuously, they are advised to opt out.
Paine said that Strunk supports the regulations proposed in Congress that could force financial institutions to adhere to disclosure guidelines because, he said, it would shake out the problem programs.
An issue for those opposing overdraft programs is how some financial institutions order transactions from large to small. Paine said that these complaints are irrelevant to the issue.
“If you only have $100 in your account and you wrote checks for $200, you still overdrew your account no matter how the transactions are ordered,” Paine said. “There’s still a certain amount of responsibility when it comes to share draft accounts. People need to balance their checkbooks.”
Mike Moebs, economist and founder of Moebs Services an overdraft program provider, said that Paine is reaching the right conclusion but for the wrong reasons.
Historically, Moebs said that consumers have always wanted the large payments paid first, such as rent, mortgages and credit card payments because those are the bills the consumer has to pay. Moebs added that from his survey of 2,028 banks and credit unions, he found that 77.8% of what he refers to as Wall Street banks order transactions from large to small, 33% of community banks do and only 6.3% of credit unions do so.
“My recommendation for the legislation coming up would be to target institutions like Bank of America and Chase and leave out the credit unions and community banks because they’re not the ones doing this,” Moebs said.
From Moebs’ point of view, a big problem is that a lot of credit unions and banks look at overdraft programs as a method of punishment.
“There are still a lot of credit unions and community banks that think these people don’t reconcile their accounts, so we’re going to punish them. That’s last millennium thinking.”
According to Moebs, the average number of transactions has doubled in the past five to 10 years, and the use of debit cards is continuing to rise.
His solution is to encourage members to have two accounts. One account would be used for everyday transactions and should not allow overdrafts if there is not enough money to complete a transactions. The other account should be used to pay bills and should have overdraft protection.
“Over time, this will cause overdraft business to go away, and especially as technology increases, these incidents will happen less.”
Credit unions, Moebs said, spend more on technology than banks do.
“Credit unions should use this technology to their advantage. Notify the member when their account is about to be overdrawn. This way the consumer that doesn’t reconcile their account knows.”
Jim Blaine, president/CEO State Employees Credit Union in Raleigh, N.C., said that the original idea behind overdraft programs was sound but that it has now developed into something different.
Originally, Blaine said, the idea was to call certain good customers if their accounts were overdrawn and have them come in and make a deposit so that it could be handled without embarrassment.
What has changed now, according to Blaine, is that a very small minority of credit union members are paying the large majority of these fees.
The new attitude that the program is not a punishment but a privilege actually encourages people to overdraw accounts and has created financial illiteracy, he said.
“Those using overdraft programs are the ones that can least afford it, and it consumes a vast amount of their paycheck. It’s a downward spiral.”
Five years ago, fees were not prevalent in the credit union industry, but now many credit unions have become accustomed to operating with these fees, Blaine said. The thinking has changed, he said, to what is financially good for the credit union and not what is good for members.
“It’s severely tarnishing the credibility of the credit union movement. I feel strongly about it because credit union is a brand name and if the name is damaged, it hurts all of us.”
Blaine explained the way SECU does overdrafts. A member has two accounts, he said, and if a transaction on one account can’t be paid, the employees look to see if there is money in the other account to cover the charge. If there is, SECU charges the member 50 cents to transfer the money or the member can do it themselves for free. If the member doesn’t have enough money in the account and doesn’t have another account or line of credit to cover the cost, SECU returns the transaction and charges $12.
“I know the market charge is around $30 and not $12, but we haven’t forgotten who we are and where this money comes from.”