Overdraft Privilege from the Member’s Point of View

By John M. Floyd, CEO, John M. Floyd & Associates

The mantra of the credit union community is serving members. Members are what make a credit union tick and – with all the competition in the market – their loyalty is priceless. So what member benefit can set your credit union apart from all the other financial institutions your members have to choose from? One answer can be overdraft privilege.

Take for instance the Washington State Employees Credit Union (WSECU), a $1 billion institution in Olympia, Wash. D Lou Stewart, Vice President of Support Services and head of the Overdraft Privilege Project Team, said, “I believe the overdraft privilege service keeps us competitive with other institutions vying for our members. Overdraft privilege seems to be a retention tool for us and we have shown a decrease in accounts needing to be force closed.”

What do members like about overdraft privilege?
Members that use the overdraft privilege program always have great things to say about it. Just think about how members would react to these benefits:

• Covering unintentional mistakes – There is a time in everyone’s life when they forget to record a check. With overdraft privilege, when this happens, members can breathe easier because their rent, car note or merchant check won’t be returned.
• Maintaining credit worthiness – Many members appreciate being spared the embarrassment of returning to the retailer to “make good” on a check. And the only fee they will have to pay is to the credit union.
• Upholding privacy – Members like knowing that friends and family are never involved if they write a bad check.
• Providing a financial service – For many members, overdraft privilege is a service they choose to use periodically to get them through tight situations; for others it’s a safety net.
• Offering free share drafts – Free share drafts is a popular service that is often coupled with overdraft privilege, giving members two convenient service options.

“Overdraft privilege brings a service to the members WSECU didn’t have before,” Stewart said. “It provides members help with financial management and saves them a lot of time and expense with merchants on returned items; mostly due to a timing or calculation error.”

At the Abilene Teachers Federal Credit Union (ATFCU), a $150 million credit union in Abilene, Texas, before overdraft privilege was implemented, members would call the credit union upset because their checks were returned to the retailers. They complained that ATFCU knew they would be paid on the first and the fifteenth of the month.

“Implementing an overdraft privilege program has helped our member relations because we don’t get these calls any more,” Steve Scott, ATFCU Controller, said. “The members that use it love it.”

When Richard Gifford, CEO of the $400 million LAFCU Federal Credit Union in Lansing, Mich., was asked if his members were pleased with the overdraft privilege program, he said, “We’ve had very positive comments about our overdraft privilege program. It has made us some income, but more importantly, it has saved our members a lot of money.”

Before overdraft privilege, if LAFCU members overdrew their account, they would get charged $20 for a returned check, then it would go back through the system and they would get hit with another $20. Plus the member would have to pay the merchant the bad check fee, which is $35 to $50. Now LAFCU members pay the one- time $20 NSF fee, saving them an additional overdraft fee and merchant fee, and the embarrassment of being on the “bad check list.”

Member responsibility
Like with any member benefit, overdraft privilege can be misused. That is why many credit unions choose to keep close tabs on the program and attempt to thoroughly educate their members. The Baxter Credit Union (BCU), a $725 million credit union located in Vernon Hills, Ill., sent out a mailer to members, specifically addressing some important overdraft privilege services including:

• their overdraft limits;
• which accounts it would be applied to;
• what specific criteria qualifies for overdraft privilege and what does not;
• how they can lose the privilege; and
• how to use it.

Six months later, BCU followed up with another mailing that was a how-to booklet on managing overdraft privilege. “We sent this out as a member responsibility piece,” said Scott Prochnow, Director of Training. “We want our members to know that we are here to catch them when they need us, but also to know they shouldn’t rely on the service.”

BCU has had some members misunderstand overdraft privilege, believing it to be an overdraft line of credit, with the credit union allowing them to pay back the money slowly. “If this happens, your members are digging themselves into a hole,” Prochnow said. “We work directly with these members, helping them get out of this financial situation and we make sure they understand how the overdraft privilege program works.”

Myth: Those who use overdraft privilege are “bad” members
As you can tell from the examples included here, members like having the overdraft privilege program available to them. Unfortunately, the mindset of many credit union employees is that these members are taking advantage of the credit union and they aren’t the best members to have. That’s not true. Just because someone makes a mistake now and then does not mean he or she is a bad member.

Scott said that at ATFCU it took a change in the employees’ attitudes to make the program successful. “Having staff training was the best approach. All the staff accepted the program well and now there are some staff members using overdraft privilege with their own personal accounts.”

At BCU it took some time for the employees to understand the program. “We had a policy that stated if a member had more than six NSFs, we would close the account,” Prochnow said. “This is why the training is so important. Our staff thought the money would go flying out the door and it would be lost forever.” BCU rolled out the program to every one of its 40,000 share draft account members without a hitch.

Why is training so critical?
“Originally our staff felt that if you were an overdrawn member, you were a bad member, and that’s why training meant so much to the success of our overdraft privilege program,” said Carolyn Coffman, LAFCU COO. “Through training, our staff realized that everyone makes mistakes and it doesn’t necessarily make them a bad person. The staff came out of the training session with a much more positive attitude,” she reported.

Gifford (CEO at LAFCU) said, “After the training, we still had some resistance from a few employees because they felt like we were encouraging members to be ‘bad.’ But before too long, they saw the value of the program and that it was really helping our members.”

Gifford and Coffman agree that training the staff is the most important step to a successful overdraft privilege program. If employees don’t understand and accept the program, it won’t work. “Overdraft privilege was a cultural change for the staff, shifting from viewing overdrafts as grounds for penalty, rather than a service,” Richard said.

When training employees, start by identifying the problems you are solving
Employees need to know the benefits of overdraft privilege and the problems it is solving for their members for the program to really work. The problems solved are the same reasons why members like overdraft privilege so much. They include:

• covering unintentional mistakes;
• maintaining credit worthiness;
• upholding privacy;
• providing a financial service; and
• offering free share drafts.

By clearly identifying the problems overdraft privilege solves for members, a thorough training experience can take place.

When implementing an overdraft privilege program, a quality overdraft privilege provider will send an experienced trainer to your bank. And in addition to the training of member service staff, the overdraft privilege provider should also arrange for complete training for the credit union’s “back room” operations employees. Be sure the provider will work with the staff throughout the installation and launch of the program to ensure it runs smoothly and all the members’ questions can be answered.

Benefits to the credit union are many
Because employees may be resistant to change, it’s also important to communicate to them the benefits the credit union will see along with the benefits to members as a result of implementing an overdraft privilege program. They include:

• a simplified, straightforward system to monitor overdraft accounts;
• a way to “rehabilitate” members who have consistently overdrawn in the past;
• a complete turn-key marketing and advertising program;
• an employee training session on how to present and discuss the overdraft privilege program with members;
• assistance with all compliance issues as well as all overdraft privilege policies and procedures;
• a structured process for communicating with overdraft privilege members that keeps charge-offs to a minimum (an automated collection system which interfaces with the bank’s core processing system); and
• a significant increase in NSF income, which drops directly to the credit union’s bottom line. In fact, many credit unions implementing overdraft privilege have seen NSF fees increase anywhere from 50% to 200%.

Overdraft privilege – a win-win situation
Every credit union wants to add member benefits, but when you add member benefits that are also good for the credit union, the result is a win-win situation. The members benefit from the financial help overdraft privilege provides and the credit union benefits from additional fee income.

The credit unions mentioned above have benefited financially from overdraft privilege returns. For example:

• WSECU implemented an overdraft privilege program in August 2002 and has seen an increase in non-interest income every month since;
• ATFCU’s non-interest income quickly doubled and – 14 months after implementing the program – that increased income has held steady;
• LAFCU has seen its non-interest income increase 150%; and
• BCU launched an overdraft privilege program in February 2003 expecting to see its non-interest fee income increase by at least 50%, but that figure was well below its actual fee income, which was up more than 230%.

“We feel like we are offering our members a true service, and that’s why we decided to install an overdraft privilege program,” BCU’s Prochnow said. “If I had to do it all over again, I would definitely install the program because of the benefit it offers our members and its financial boost to the credit union.”

“We are always looking after our members and their needs, but we must also compete,” LAFCU’s Coffman said. “I think it’s important when you have people shopping financial institutions to have comparable, if not better products, available. And if we’re not offering overdraft privilege, someone else will.”

“My advice to other credit unions is to not be afraid of overdraft privilege because it is something so simple that works so well,” ATFCU’s Scott said. “For credit unions, there is a perceived risk involved because we want it to be a member service, and that’s what it is. First and foremost, we’re doing the members a favor – they’re happy with the service and we’re happy with the fee income.”

Credit union members are happy with overdraft privilege, which is why they continue to use the program. Plus the credit unions are happy to find a tool that benefits the members and boosts their income.

John M. Floyd & Associates (JMFA) is a 30-year-old profitability consulting firm that, in addition to overdraft privilege, offers operational, financial and delivery system re-engineering services to financial institutions. The company’s diverse consulting assignments have brought positive results to more than 1,650 credit unions and banks in 46 States and Central America, adding more than $5 billion in increased pre-tax earnings for its clients. JMFA is recognized as one of the leading vendors of overdraft privilege programs – installing its programs in more than 550 credit unions and banks in the past 15 years. JMFA also is recognized nationally for its training, incentive and earnings enhancement programs, as well as its product, service, pricing and technology improvement consulting services. To learn more about John M. Floyd and Associates, visit the company’s Web site at www.overdraftprivilege.com. To contact John Floyd directly, call 800-809-2307 or email him at John.Floyd@jmfa.com.