Regulation E changes will decrease overdraft fee revenue in an already tight earnings environment. How will tightened standards affect credit unions? Callahan & Associates surveyed more than 150 credit unions about their sources of non-interest income. Here are some of the preliminary figures around NSF/Overdraft/Courtesy Pay.
For participating credit unions overdraft fees (NSF fees and Courtesy Pay) compose 28.1% of total non-interest income (the sum of Fee Income and Other Operating Income).
In 2009, credit union non-interest income totaled $11.6 billion; such fees, then, account for approximately $3.26 billion in income for the industry. What will that revenue stream be a year from now?
Moving forward, checks and recurring ACH payments will not require an opt-in for NSF fees. POS/Debit and ATM transactions will require the customer's consent. ACH transactions are in a gray area as the treatment may depend on where the transaction originates. According to a 2008 FDIC study of more than 1,500 financial institutions, the group (assuming ACH transactions are evenly split) is approximately 55.9% of NSF transactions.
So, of the $3.26 billion in NSF fees, $1.82 billion will be in flux and will be determined by how many members opt-in. I’ll assume the overdraft fee income from checks and recurring ACH payments will remain the same at $1.44 billion.
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The potential effect on credit union ROA will likely be around 10 basis points. A few caveats: ACH transactions represent $462.9 million in NSF fees. I've assumed (purely for ease) transactions are evenly split. The actual division will depend on the credit union's members' online habits and its online banking provider/data processor. Additionally, not all members need or use overdraft protection. If only 10% of members use the service, credit unions only need those 10% to opt-in to maintain the same level of revenue. On average, the FDIC study found 26% of customer accounts used the service.