Overdraft Protection; Why Not Ask the Consumer?

Rules and regulations governing overdraft payment programs are in the process of being finalized. Consumer demand has driven the growth of a number of financing sources such as credit cards, flexible mortgages, and overdraft payment services.


There is a lot of discussion these days about overdraft payment programs and if they are an appropriate service for credit union members. Rules and regulations governing these programs are being finalized creating a financial environment designed to protect the consumer against improperly designed and mismanaged services. Financial institutions are now – or soon will be -- required to follow the letter of the law in the way these programs are structured and implemented. Yet there is still debate between some as to whether or not they are a good service or a bad. Consumer groups continue to put them under the microscope.

In previous articles we’ve authored for this publication we have focused largely on compliance issues, our last column dealing with proper disclosure. But I’d like to back up for a moment. Amid all the confusion, clutter and political posturing, no one seems to be asking the consumers how they feel. Let me switch gears and address the fears coming from our detractors and consumer advocacy groups.

We published a document titled Consumer Checking Account Overdrafts: Confusion, Myth, and Fact. In that published piece, which we made available to both customers and prospects, we look at the basics surrounding overdraft protection.

First, let’s look at the various forms of overdraft protection. Historically, financial institutions have resolved overdrafts three ways: draw from the consumer’s own funds from accounts other than the overdrawn account; protection established by a consumer’s established line of credit; and discretionary overdraft payment that is provided to consumers at the sole discretion of the financial institution. The third option, of course, is the one we’re focusing on.

Our first premise regarding discretionary overdraft protection programs is -- not all overdrafts are necessarily a “bad” thing. In many cases, credit union members want and need short term financing help with relatively small dollar amounts. To identify all overdrafts as “bad” is simply myth.

Consumer advocates also contend that by providing overdraft privilege, financial institutions are encouraging overdrafts. If these programs did not exist, they say that consumers would rarely engage in overdrawing their accounts. Statistics simply do not bear that out. Research tells us consumers will incur substantial NSF fees and penalties whether they’re protected under an overdraft payment program or not. Clearly, consumers do not have to be encouraged to write overdrafts.

We’re not suggesting that overdraft payment services don’t make money for the financial institution. They have, in fact, provided increased revenue for credit unions to reinvest into their organizations and their services. But what drives the success of overdraft privilege services is and has always been the consumer. These programs are successful in many credit unions today not because they create consumer demand but because they satisfy it.

Consumer demand has driven the growth of a number of financing sources such as credit cards, flexible mortgages, and overdraft payment services. And this demand is not likely to go away regardless of the well-intended efforts of those who would choose to protect us. Consumers should always be educated and encouraged to practice sound financial behavior. But we also believe they are much more capable of making informed and intelligent choices than some bureaucrats and consumer advocates would like to think. For more information about Strunk & Associates, give us a call at 1-800-728-3116, email us at information@strunklp.com or go to our web site at www.strunklp.com.

In business since 1976, Strunk & Associates, LP is a financial advisory service recognized nationally for its innovative design, development and implementation of The Original “Overdraft Privilege Service Program”. Strunk & Associates, LP currently has Overdraft Privilege Service Clients throughout the United States and the Caribbean.



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June 26, 2006


  • Credit unions need not stoop to the banks' level to remain profitable. Managers concerned about next year's bonus shouldn't boost ROA on the backs of the membership. Such managers need to decide if they're serious about being non-profit cooperative managers. If not, banks are hiring every day.