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THE BUSINESS CASE FOR LOWER OVERDRAFT CHARGES IS SHIFTING CU PRACTICES.
For business and service reasons, credit unions are moving away from considering overdrafts an abuse and fees as punishment to correct bad behavior. Instead, they're making overdraft protection-also known as "courtesy pay"-as just another service, offered at a fair price.
$3.5 billion Idaho Central Credit Union (iccu.com), Chubbuck, decided in 2010 to go this route. "We changed course to make it a legitimate service instead of a penalty," explains CUES member Brian Berrett, CCE, CFO. "We dropped the fee from $25 to $18.79 and took a haircut of about $1 million in noninterest income that year, but we made it all back in 18 months because members liked the new fee better and used it more as a service."
Since then the fee has gone up to $19.79, and revenue from those fees is now up to $1.6 million a month, he reports. Limits are tiered, based on member qualification. "We're the low guy in our market, but that's where we want to be," he says. Users are a mix of those who overdraw rarely and those who overdraw frequently, he adds.
Idaho Central CU's experience-increasing noninterest income by cutting overdraft fees-may seem counterintuitive, but holds up across the industry, says Michael Moebs. His Lake Forest, Ill., economic research firm, Moebs $ervices (moebs. com), collects and analyzes a lot of data. "The credit unions charging a reasonable fee for an overdraft-$20 or under-are making 22.6 percent more revenue than credit unions charging higher fees-over $20," he reports.
Overdrafts at Idaho Central CU are just one instrument in a kit of money management options, Berrett says. Members can get alerts when their checking account balance falls below a threshold they set, he explains. Or a transaction that would cause a negative balance could trigger an automatic transfer to cover it.
"We make it easy for them to transfer funds quickly from other accounts at our credit union or from another financial institution," he notes. "They can do it with their mobile device."
Some members use these tools to avoid overdrafts, he says. Others don't bother. "When we see a pattern where members are racking up avoidable fees regularly,...