As big banks make headlines for slicing or eliminating their fees for overdrafts, smaller challengers are placing further pressure on credit unions to follow suit.
“The push for this is not just consumers who are tired of being hit with fees, rather the pressures are coming from regulators and digital bank competitors … as long as they persist, credit unions are going to be rethinking their overdrafting similarly to larger banks,” said Charlotte Principato, an analyst for the data intelligence firm Morning Consult in Washington.
Credit unions that describe themselves as digitally savvy are especially responsive to this pressure. When the $15 billion-asset Alliant Credit Union in Chicago did away with fees on checking and savings accounts on Aug. 2, it was a response to new digital rivals in the financial services industry.
“If I were to say what was the driving factor [for the change] it would be the fact that we're a digital financial institution and the competitive environment is moving to make simple decisions regarding the choices customers make around who they want to bank with,” said Dennis Devine, Alliant's CEO.
For example, Chime has a service that allows customers who receive direct deposits of $200 or more per month to overdraw their accounts by up to $200. Another example is Dave, which lets customers link external bank accounts and move funds around when the bank senses an overdraft is imminent.
Other pressures are coming from large banks and federal regulators including the
While some credit unions are making adjustments to the maximum amount that can be overdrawn before posting fees or instituting a short grace period to allow members to add funds, Alliant removed the charges altogether, and made its courtesy pay service free.
“The opportunity to do something distinct and disruptive is something we're always going to do to try to challenge traditional antiquated norms or the way things used to be," Devine said. "Overdraft is the way it used to be and there's a better way."
Some credit unions are eliminating overdraft fees more gradually.
When U.S. Eagle Federal Credit Union in Albuquerque, New Mexico, began the practice of waiving fees for non-sufficient funds and overdrafts at the onset of the COVID-19 pandemic, it spent the following months weighing the financial impact the absence of fees had on the credit union against the benefit it offered to members. It chose to do away with the fees altogether in October 2021.
“Here in New Mexico, with our economic position, we have a lot of folks that just are living from paycheck to paycheck," said Marsha Majors, president and CEO of the $1.4 billion-asset U.S. Eagle. "Eighty percent of our people paying these days told us that they're living paycheck to paycheck, and since we're always looking for those opportunities to make some positive changes for our members, it simply aligned with what we needed to do as an organization.”
Overdraft fees on average accounted for roughly 23% of the credit union’s total noninterest income and approximately 6.5% of revenue on average, generating between $2 and $3.5 million per year.
To account for that deficit, U.S. Eagle is examining opportunities to add new services within its insurance offerings, business deposit services and membership growth as initial possibilities.
“A conservative estimate would be a loss of approximately $2 million for the year … it's going to impact the short term and we recognize that, so in the meantime our focus will be on offering new products and services and focusing on the [deliverability] of those products and services versus the one to one match, to recover all of the revenue,” Majors said.
Lynette Cupps, senior vice president of growth and innovation for the $2 billion-asset MAX Credit Union in Montgomery, Alabama, said that the institution first began exploring the option to do away with NSF and overdraft fees when it launched its student spending account for members under the age of 18 in early 2021.
“We did it in the student spend account because we felt like that was the right thing to do for young people that were learning how to manage their finances, and then it became more of a, 'Well … why don't we extend that to the rest of our membership?' ” Cupps said.
In addition to features MAX already offers to members to prevent penalizations such as card controls to limit and monitor spending, the credit union rolled out similar changes across all of its accounts on Jan. 3 that eliminated NSF fees and created a buffer allowing members to overdraw their accounts by up to $10 before incurring charges.
“With our mission of ‘people helping people,’ this is the right thing to do and this is the right way to help people not have a cycle of fees … this is a way to help them continue that financial success,” Cupps said.
University Credit Union in Los Angeles removed its overdraft fee on Jan. 3 with a goal of promoting financial inclusion. "As a not-for-profit financial cooperative, it's our top priority to give all of our members the financial advantages they need to succeed," David Tuyo, the $1 billion-asset credit union's CEO, said in a press release Wednesday.
