By Lisa Hochgraf
Draft legislation has been introduced that would severely limit financial institutions' ability to charge large overdraft fees. While such a rule would be beneficial to consumers, it would also diminish industry non-interest income in these tough times.
During the recent free "Quarterly Slant" Webinar (get the playback here), three knowledgeable guys from Cornerstone Advisors Inc., CUES' partner in creating the monthly CUES Technology Edge e-newsletter, talked about the potential impact for credit unions should the new rule become law.
First and foremost, the proposed legislation would limit the income banks and CUs could reasonably expect to see from overdraft protection programs, as both the per-fee amount and the number of fees that could be assessed in a given time would be limited.
Lower-dollar fees would help consumers, who have paid a lot at the point of sale sometimes when their debit card overdraws their account by even a few dollars. "So your double-cheese Whopper isn't going to cost you $25 anymore," quipped Steve Williams, a principal of Cornerstone.
And limiting the number of overdraft charges that can be made (this article says the proposal is to set the bar at one a month or six a year), is in keeping with what responsible financial institutions are doing anyway. "It's pretty irresponsible to be charging 12 fees a day," said Bill McFarland, Cornerstone's managing director.
Since CUs are responsible organizations as a rule, there's probably more sizzle than steak in that aspect of dealing with the provisions of the new law. And another key component of the proposed rule--giving members the ability to opt in or out of such a program--may not be a super huge deal for CUs, the Cornerstone guys asserted.
"We hope consumers will understand that if they opt out, they're still going to be paying a fee; it's just going to be to Walgreens or whoever they paid the check to," noted Terence Roche, also a Cornerstone principal.
All this is not to say that the loss of revenue wouldn't be real. According to figures cited by Williams, banks and CUs took in close to $24 billion in overdraft fees last year as an increasing number of Americans withdrew more from their checking accounts. And the same article referenced above reports that one bank, J.P. Morgan Chase, has already stated that it stands to lose up to $500 million a year if this proposal becomes law.
Suddenly that sounds pretty meaty.
Williams says a good first step to managing the situation is to do some modeling. Ask questions like, "What can I expect in my NSF income next year?" he suggested. "I see folks coming back and putting about 10 to 15 percent less income in next year's budget because of the flattening in the economy and the expected regulations. I haven't seen many CEOs like to budget down in a revenue category. There's going to be a lot of head scratching."
"Play some different assumptions," advised Roche. "What happens if we cap at three charges a day? What happens if we give forbearance at 10 to 20 bucks? I think there needs to be a little scenario planning."
The Cornerstone guys agreed that credit unions that offer overdraft programs would "take a little haircut" if the new rule becomes law. But there could be ways to make up the loss--such as going back to charging for checking accounts.
The amount of revenue lost if the new overdraft rule becomes reality "is a number that will impact a lot of credit unions," McFarland concluded. "But if that's your sole source of fee income, you've got a problem. You've got to have diversification."
What are your expectations about the impact of this new rule? What are you doing to prepare for it?
Read more about non-interest income in this article from the September 2008 issue of Credit Union Management.
Also read this article "Pay to Play: Fees, done right, can help credit unions enhance their member service" and this post "Overdraft Protection Reform: A Tough Pill To Swallow For Many Credit Unions."
Lisa Hochgraf is a CUES editor.
