Free Overdrafts Are Not Really Free, And Neither is Attacking Other Credit Unions

By John Deese

John Deese is president/CEO of Guardians Credit Union in West Palm Beach, Fla.

I recently discovered that a credit union was advertising “free NSFs and overdraft services.” On the surface, it seemed like a clever marketing tool, which is certainly their prerogative. The troubling part is that it was using the opportunity to blast banks and credit unions that charge a fee by quoting data that says they take $30 billion annually from consumers. It further states it is being taken from consumers that can least afford it.

While on the surface this sounds terrible and could easily be turned into a political weapon by our adversaries, I think there is much more to the story, which I will share later in my thoughts.

But most concerning is that a credit union that is supposed to embrace cooperation would attack other credit unions. As I pondered this issue I had to pause and wonder if this is an isolated attack by an arrogant CEO and credit union or is it the new “norm” for future credit union advertising? I hope it’s an isolated attempt to create news that doesn’t really tell the whole story.

A Perplexing Issue

As the CEO of a credit union for 43 years, I have struggled with how to help the underserved while also providing great member service and valuable products to all of the membership. One of the perplexing things that I have tried to grasp is why people continue to have NSFs and are willing to use courtesy overdraft services. Part of the strategy at my credit union has been to monitor these accounts and reach out to members on a regular basis to offer low-cost loans or other ways to help them get out of the cycle of using those services.

In my conversations with many of these members, the one thing I realize is they are aware of the services they are using and often times consider it part of their financial existence.

Members, like the rest of the populace, often act irrationally and contrary to their best interests; this is true in financial matters and especially with NSF fees.

Offering a loan to them fails as a solution because they feel they will just use the money and the NSFs will start again and at that point they will be paying NSF fees while still having a loan to pay. They have also shared with me that using a courtesy pay overdraft is so much less expensive than using the payday lending organizations, since their interest rates are excessive.

Not Meeting Needs

Payday lenders have thrived because credit unions didn’t—and still don’t—meet the needs of folks who use these lenders. It seems to me that if credit unions really want to do something to help the underserved, our best collective efforts would be to put the “payday” lenders out of business and help develop a financial services model that would truly provide much needed services to the underserved in our communities.

On the surface, the idea of offering free NSF and overdrafts seems wonderful, but in the end the rest of the membership will subsidize this service. And, sadly, the very people that can least afford it are most likely going to be forced out. I say this because you have to consider the staffing time it takes to process the NSFs, the costs for the processing, the potential charge-offs with overdrafts, and the potential fraud. And this fraud will likely will be expanded when you allow accounts to be opened using a marketing ploy to attract the general population with “free” services.

Nothing in Life is Free

Nothing in life or financial services is free. Most courtesy overdrafts are designed with the losses factored into the overall program. If we have no fees to cover the losses then it follows that you will have to tighten your criteria, which will eliminate more people from using the product. That will lead to forcing them to turn to payday lenders to get help and paying fees far above any reasonable fees charged by credit unions.

The answer is to embrace the cooperative spirit of credit unions and to avoid using advertising tools to attack other credit unions. We are better than this and can avoid conflict within the “family” by working together on a common goal whether that be eliminating the appeal of payday lenders or making sure that banks do the right thing for consumers.

While I agree we need to do more to help the underserved in our communities I feel strongly there are ways to do it cooperatively. Maybe after 43 years I am too idealistic, but if that is the case I accept it and hope that others that take over the leadership when I retire will continue to carry the torch of cooperation.