By Christian Mullins
When the banks started failing, we marked it as a difficult time for America but an opportunity for credit unions to shine. After TARP (Troubled Asset Relief Program) became a dirty word in the minds of most Americans, credit unions were thankful that the internal struggle over lobbying for access to funds took as long as it did. Collectively, credit unions have fared better than our collective banking brethren both in public image and policy ramifications, but bill H.R. 1456, the Consumer Overdraft Protection Fair Practices Act, should be detrimental to both sides.
Under H.R. 1456, members will have to sign up for overdraft protection plans rather than accept automatic enrollment. When conducting a transaction at an ATM or point-of-sale (POS) terminal, members would be notified if it would result in an overdraft fee, then given the option to accept the fee and continue or cancel the transaction. Finally, and hopefully no credit unions are guilty of this, credit unions would no longer be able to manipulate the order in which electronic transactions are posted in order to maximize NSFs or overdraft fee income.
Each provision seems reasonable, especially from a consumer point of view, so why is it being opposed by CUNA, the ABA, and the Independent Community Bankers of America?
Loss of Fee Revenue
In 2008, credit unions totaled almost $7 billion in fee income, and it is estimated that between $4-6 billion was the result of NSF or overdraft protection program fees. For an industry that had a total net income of $2.4 billion last year, any significant loss of fee revenue could be devastating, and this bill is designed to do exactly that.
Tightening of Deposit and Interest Rates (or buildings, or staff)
Many credit unions have taken a pounding on their net worth ratio in the last year or two, and the prospect of further decreases will not be tolerated if it can be helped. To recoup some of the lost revenue, abysmal deposit rates will sink even lower while lending rates increase. Conversely, they could always close less profitable branches and/or terminate staff if they want their rates to remain competitive.
Increased Competition
Not every credit union or bank offers a full set of overdraft protection programs; many smaller institutions and a few larger ones offer only a line of credit or the ability to transfer funds from another account. If this bill becomes law it will not affect all credit unions equally. Generally speaking, most of the larger banks and credit unions offer some type of "courtesy pay" program, and financial institutions that don’t offer it may find themselves with a temporary competitive advantage because they’ll have to do less to recoup any estimated revenue loss.
The majority of NSF and overdraft protection fee revenue comes from a small percentage of the membership, and a major change to the current formula will impact a majority of the members, albeit to varying degrees. Whether or not a change is warranted is immaterial: The bill is written and the general public will like it. They’re still receptive to the idea of keeping the banks under a stiff regulatory thumb, and if a few credit unions have to make difficult choices as a result, they can live with that, and we’ll have to, too.
Christian Mullins is a strategic analyst for the credit union industry and author of the CU Potential Blog.
