New Filene Report Urges a Rethinking Around Non-Interest Income and Overdraft Programs

(From CU – It’s time to rethink non-interest income, particularly around overdraft protection programs, according to a new report from Filene.

The report, “Overdraft Protection Programs: Credit Union Best Practices,” was authored by Luis Dopico, an economist with Filene.

“Shifting consumer behavior and expectations are sparking a public reevaluation of fee based services, such as overdraft protection, and these programs may not be viable source of income for much longer. Credit unions should pursue new sources of non-interest income that will best serve members, including frequent overdrafters,” Dupico stated in summary slides released in conjunction with the report.

As the report notes in the slide below, margin compression in net interest income drives the need for noninterest income. Among credit union respondents to the Filene survey, overdraft protection revenues accounted for 13% of noninterest income on average.

According to the Filene report, 82% of members are non-overdrafters, 16% are light overdrafters (one to two overdrafts per year), and 2% of members are “heavy overdrafters,” meaning they overdraft three or more times per year and average 12 times per year.

The report urges credit unions to understand which members frequently overdraft, when they are likely to do so, and why it is happening. It further calls on credit unions to experiment with member friendly reforms to overdraft protection programs including:

  • Transition members from courtesy pay to standard loan products, such as small-dollar loans, credit cards, and, lines of credit.
  • Reach out to habitual overdrafters to offer financial counseling and workout loans.
  • Reduce or eliminate fees on small transactions.
  • Offer premium checking accounts with subscription fees in lieu of courtesy pay. (As reported here, Marine Credit Union in Wisconsin has introduced a subscription-based overdraft account.)

Time to Diversify

“Although overdraft protection revenues can account for substantial noninterest income, revenues may shrink in coming years due to regulatory pressures, litigation, changing consumer expectations and reputational pressures, and competitive pressures as more financial institutions reduce their reliance on these fees,” the report states. “Reimagining ODP programs is an opportunity for credit unions to better understand some of their most vulnerable members while proactively diversifying their sources of non-interest income.”

Additional information on the report can be found here.