How much is too much? That’s the question on the minds of credit union managers and bankers as they wait to see what the Consumer Financial Protection Bureau (CFPC) decides to do about overdraft fees. Financial institutions face the Goldilocks dilemma – they have to set overdraft fees so they are not too high to offend the CFPB, not too low so they lose revenue, but just right.
In anticipation of the pending CFPB ruling, some consumers are forging ahead with class action suits to make an example of those institutions with [perceived onerous overdraft rules. A dozen credit unions in nine states are already facing class action suits related to how they disclose overdraft fees. One attorney, Michael Bell of Howard & Howard in Royal Oak, Mich., believes this is “the tip of the iceberg” and more than 100 credit unions could be sued for overdraft policies before the smoke clears.
The nuances of the these class action suits demonstrate the diversity of policies in the market, and the grounds for consumer complains. For example, MidFlorida Credit Union has a case pending claiming the credit union changed overdraft fees on available balances rather than actual balances.
The pattern seems to be that the CFPB will identify a potential overdraft issue and banks and credit unions move to make a correction. Shortly after the CFPB identifies a questionable overdraft practice, law suits will start to pop up against large banks, and then against credit bunions. It’s also interesting to note that most of these class action suits since September have been initiated by two law firms, McCune Wright of Redlands, Calif., and The Kick Law Firm of Santa Monica, Calif.
Clearly these types of suits will continue for some time yet, and the larger the asset size of a bank or credit union, the greater the risk.
However, as reported in a recent article in American Banker, financial institutions are already rethinking their overdraft strategies and looking for ways to use overdraft fees as a way to help the underbanked and protect customers rather than gouge them. Granted, overdraft fees continue to be a major source of income for financial institutions. As Geoffrey Hesslink, chief executive of Merchants Bank in South Burlington, Vt., explains it, "Overdraft borrowings are well below our expectations… The revenue miss there has been significant and material, frankly, to our earnings." However, bankers are looking to head off both CFPB and customer criticism with new lower overdraft fees and new, more transparent overdraft policies.
No matter what action the CFPB takes, it’s clear that overdraft fees are here to stay, although they will change in the coming months. As Lynn David, president of Community Bank Consulting Services, noted in a recent BankThink article for American Banker, eliminating overdraft fees altogether would be disastrous. Not only would it affect bank revenue, but consumers would be left without much-needed protection. Rather than dealing with a a predetermined overdraft protection fee, they would have to deal with NSF charges from both the bank and merchants. No one really wins with NSF while reasonable overdraft fees offer real benefits to consumers and financial institutions.
So you do you determine if your overdraft fees are “just right?” You need a competitive benchmark that not only tells you what your competition is charging, but also gives you a metric to demonstrate to regulators that your fees are in line with the market. Fees vary based on institution size and geography, and with the saber-rattling of the CFPB more financial institutions are changing overdraft fee structures in anticipation of new CFPB rules.
To help banks identify changes in overdraft fees and offer a competitive benchmark, we now offer TrendSpotter, an analytical tool that quickly reveals trends in retail fees, including overdraft. TrendsSpotter assimilates data from our FeeBuilder database of national retail deposit fees and gives you a benchmark for fee trends to show you the impact fees have on volume and revenue. By overlaying your own fee data you can see exactly where your overdraft fees call in line with the market. It’s a great tool to help you see if your overdraft fees are too high, too low, or just right.