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While Economy Improves, Many Consumers Still Need A Financial Safety Net

If your bank or credit union isn't providing overdraft services, consumers will likely look elsewhere

By John M. Floyd, Chairman and CEO

Encouraged by improvements in the housing market, falling energy prices and a low inflation rate, economists are becoming more optimistic that 2014 will be a breakout year. But as many consumers remain concerned about unemployment and financial issues – ranging from meeting everyday financial obligations to paying off additional expenses due to holiday purchases and covering upcoming income tax responsibilities – personal economic issues can weigh heavily on the mind and the pocketbook.

According to a survey by Bankrate.com, nearly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings. Fewer than one in four surveyed had enough of a cushion to cover unexpected medical expenses or other emergencies. To highlight the effect this has on personal finances, the Center for Financial Services Innovation found that an estimated 15 million people access small-dollar credit products to meet their financial needs every year.

Whether as a result of unplanned expenses or an error in reconciling a checkbook, financial shortfalls can happen to anyone. Without a financial safety net, many consumers often experience difficulty paying their bills and face costly merchant check return fees when their account has insufficient funds to cover a check. By providing a user-friendly overdraft program, your credit union or bank can help consumers avoid these difficult situations.

A fully disclosed overdraft program reassures account holders that their items will be covered and their ATM and/or debit transactions won’t be denied. When this translates into the ability to pay one’s mortgage or rent on time, or cover the cost of medical needs and other essentials, it can make a tremendous difference in an account holder’s life. Plus, access to overdraft services can help consumers avoid more costly, often unregulated, alternative financial services.

Taking a closer look at fully disclosed overdraft programs
As an advocate of completely transparent, fully disclosed overdraft programs, JMFA – in partnership with Washington D.C.-based Morrison Foerster LLP – gathered information about overdraft program processes and procedures used by 50 financial institutions across the country. The goal was to get a detailed look at the impact disclosed programs have on consumers.

According to the study results, there appear to be two distinct patterns of overdraft use: consumers who use the program occasionally – and in many cases inadvertently (15 percent) – and those who regularly rely on overdrafts to meet their near-term liquidity needs (85 percent).

Understanding patterns of overdraft usage
Occasional users generally do not plan to incur overdrafts. Many do so because they have not kept track of their account balances or have made mistakes reconciling their account. Or, they intentionally overdraw their account in order to make payments that they consider important and that they expect to cover with a deposit in the near future.

Because they do not incur frequent overdrafts, occasional users are less likely to understand their financial institution’s overdraft practices. This includes individuals who have incurred significant overdraft fees for debit card and ATM transactions because they were relying on their financial institution to reject these transactions if they would result in an overdraft. On the other hand, consumers who regularly overdraw their accounts do not appear to have a liquidity cushion and use overdrafts to help them cover their expenses on a regular basis.

Whether a consumer only uses overdraft services occasionally or on a more regular basis to meet his or her near-term liquidity needs, it is essential that financial institutions provide easy-to-understand information about how their overdraft program works. Account holders should know from the outset the costs associated with using the service and the importance of returning an account to a positive balance. This, along with counseling regarding alternative strategies and services that might be better suited for a consumer’s individual needs, will encourage responsible program use and demonstrates a commitment to maintaining full compliance with all regulatory expectations.

Informed consumers can rest assured that purchases will be paid
With established limits, a fully disclosed overdraft program clearly defines the rules for how an account holder may access the service. Moreover, a consumer-focused, disclosed program provides a thorough explanation of the terms and processes used in its implementation and offers overdraft limits that are set with the consumer’s full knowledge.

When necessary, this limit can be adjusted, eliminated or re-instated, depending on the situation. As long as the consumer is in good standing, an overdraft will be paid to that established limit. As a result, informed account holders can avoid the extra expense of merchant fees and penalties for a returned check, they won’t worry that an ATM or debit card transaction might be declined, and they can rest assured that important purchases will be paid in the event of a financial shortfall.

Changing regulations necessitate program changes
With the implementation of new consumer protection regulations and restrictions on charging fees for overdrafts resulting from ATM withdrawals and one-time debit card transactions, many existing overdraft programs are outdated or obsolete. To provide your account holders with the most up-to-date overdraft solution, your overdraft program should include the following:

• updated communications materials and recommendations for helping account holders understand the benefits of a fully communicated overdraft program and how to use it responsibly;
• improved analytics and more robust data monitoring/analysis to support better program management, as well as enhanced reporting and tracking capabilities to measure results; and
• expanded recommendations for how to gauge on-going program performance and implement any necessary improvements.

In today’s highly regulated environment, financial institutions must strike a balance of compliance and good account holder service to thrive. With the proper policies and procedures in place to educate overdraft users about the importance of responsible use, your institution can alleviate compliance concerns and better serve your customers.

Plus, by providing your account holders with an up-to-date, fully communicated and reasonably priced overdraft program, you can strengthen your position as their preferred provider of financial services and increase your competitive advantage in the market.

As seen in:
League of Southeastern Credit Union's Signal- Spring 2014
MDDCCUA, Daily Scoop- February 2014
CU Insight Headline News- February 2014

CB Insight Headline News- February 2014



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