Jan 13 2022

Overdraft Protection Programs: Credit Union Best Practices

Report  
Number  
553

Leaders in the credit union system and in financial services are reevaluating overdraft protection (ODP) programs. With shifting consumer behavior and expectations, fintech firms gaining market share, and a disparity of impact on lower income members and people of color, ODP programs are undergoing dramatic transformations. 

    Luis Dopico
    Luis Dopico
    Economist
    Report Number 553

    Executive Summary

    Overdraft protection (ODP) programs have become a reliable source of noninterest income for many credit unions, especially small institutions. But in the wake of the COVID-19 pandemic and recession, many credit unions are eliminating or restructuring their ODP programs, as well as their fees and noninterest income mix overall. One reason: shifting consumer behavior and expectations are sparking a public reevaluation of the purpose of fee-based services like ODP, especially as recognition grows that such fees typically affect a small group of members who tend to have lower incomes and weaker credit histories. 

    As a number of financial institutions move away from such programs, ODP may not be a viable source of income for much longer. How can credit unions reimagine overdraft protection? Where else can they look for noninterest income to replace overdraft fees? Based on intensive interviews with 16 credit union leaders and a review of the ODP landscape, this research presents several key findings and next steps for credit unions to rethink their noninterest income sources. 

    Why It Matters—A Credit Union Perspective

      Developed over 20 years ago, overdraft protection (ODP) programs were originally designed with empathy for members who were incurring NSF fees, both from the credit union and from the entity with which they completed a transaction. The programs were designed to help complete the transaction, avoid a fee from the payee, and incur only one fee from the financial institution providing the access to funds. 

      "Many financial institutions have developed a strong dependence on ODP to sustain their noninterest income. This report makes the reader pause and think that maybe we have relied on this source of income for long enough."
      Patty Campbell
      President & CEO
      Christian Financial Credit Union

      These programs are now under fire from consumer groups, law makers and regulators. We should ask ourselves, quite simply, are these programs even performing with the intent in which they were originally designed?

      Decades of decline in interest rates have resulted in lower yields on both loan and investment portfolios for credit unions. Many financial institutions have developed a strong dependence on ODP to sustain their non-interest income. This report makes the reader pause and think that maybe we have relied on this source of income for long enough. Maybe we should develop better products to address margin compression and consumer needs. 

      Download the report now.