For credit unions that rely on overdraft protection as a valued member service and source of revenue, new regulations requiring members to opt in for coverage of ATM withdrawals and one-time debit transactions present a daunting challenge.

The biggest headache is catching members’ attention and getting them to act before their debit card is declined at a restaurant or in the checkout lane at the grocery store. Reaching out to members who’ve used courtesy pay in the past is especially critical to head off angry phone calls—and the possibility of even losing members—agree three consultants and overdraft protection providers. In addition, the new regulations pose logistical, operational and IT challenges to comply by the July 1 and Aug. 15 deadlines. (See the sidebar on the last page of this story for a summary of the regulation).

But there may also be opportunities for credit unions that get it right to introduce overdraft protection for these transactions and to open new checking accounts for new and existing members.

Beyond Compliance

Michael Moebs, chairman of Moebs $ervices, Lake Bluff, Ill., has two central messages for credit unions working to bring their overdraft programs in compliance with the new regulations: (1) this exercise must go well beyond the compliance department, and (2) reducing overdraft fees in line with the competition is essential to increase member opt-in rates.

With its mandatory opt-in for overdraft protection of ATM withdrawals and one-time debit transactions, Regulation E presents some challenges, but it is preferable to some of “the devils we might have been faced with” had more stringent restrictions on overdraft services made it through Congress, Moebs says. For now, those bills appear to be “dormant.”

“Many community bank and credit union CEOs are thinking of this as just a compliance issue. If they continue to think that way, they’re going to lose 30 percent of their fees—at a time when three-quarters of them can’t afford to lose a penny,” he warns. “They need this revenue to rebuild their capital positions.”

The opt-in requirement is the most obvious focus, but credit unions must be working at it from a number of angles, including operational changes, staff education, marketing and pricing. For example, Moebs notes that many core processors may not be able to meet the June 30 deadline for systems that will allow electronic channel overdrafts for members who opt in, but not for those who don’t. Some are developing interim “work-around” solutions. As a result, credit unions must develop a manual, fail-safe system to flag and deal with overdrafts until their automated systems can catch up to the new rules.

“Credit unions used to handle overdrafts in a manual environment, but they need to get those processes off the shelf and dust them off,” he advises.

Silver Lining?

The impact of the Reg E opt-in requirements will vary based on how credit unions have been handling overdraft protection, suggests Heather Kline, product specialist with Velocity Solutions, Wilmington, N.C. If they’ve previously covered overdrafts resulting from ATM withdrawals and debit card transactions, credit unions might lose up to 20 percent of their revenue from these fees—largely due to lack of response to the opt-in notice.

“But for other credit unions that have never had a formal courtesy pay program through e-channels, this could be a big opportunity,” Kline says. “Regulation E says if you ask members and they say yes, you can provide this service to them. I like that Reg E gives credit unions the opportunity to ask members directly, ‘What do you want?’”

The biggest challenge will be getting members to make a decision—one way or the other—she says. Many members are used to tucking away mail from their credit union without ever looking at it, including their account statements (which, when you think about it, may be one reason why overdraft protection has been such a big hit among members who use it occasionally).

Beyond the need simply to move members to action, credit union managers and marketers need to be cognizant of what members may be hearing from friends and reading about in the consumer press about overdraft protection. Kline recalls seeing a CNN commentator urging consumers not to opt in and citing some of the stories touting the downside of courtesy pay, like incurring a $35 overdraft fee after buying a $4 latte.

What those stories ignore, suggests Marc Paine, executive vice president of CUES Supplier member Strunk & Associates L.P. (www.strunklp.com), Houston, Texas, is the many consumers who occasionally rely on and always appreciate what he calls the “peace of mind” of courtesy pay. Unfortunately, they may not hear about the need to opt in for continued coverage despite the best efforts of their credit union—or take action until their first debit transaction is declined.

“What we’re not focusing on is the impact it will have for members,” Paine says.

Getting the Word Out

Even credit unions that have gone to great lengths to fully disclose the terms of their courtesy pay programs to members in the past will have an uphill struggle to “re-introduce” the service and new requirements to opt in, Paine says. That information campaign must go well past “just another envelope in the mail from the credit union.”

“And they need to be prepared for the backlash the first time a transaction is declined, even from members who say they don’t want it,” he adds. “They’re going to be on the phone with the credit union as soon as they can to understand what just happened.”

The key is to be consistent and persistent with the message about the new requirements, but Paine urges credit unions to avoid scare tactics like dangling a threat that members won’t be able to use their debit cards if they don’t opt in for overdraft protection. Information and opt-in forms sent via direct mail should stand out from standard credit union correspondence and “lay out the pros and cons of how the service works in terms they can understand,” he suggests. “Don’t just reprint the regulations and send them out.”

Kline suggests that credit unions focus their educational efforts on the members who actually use this service. “About 85 percent of members never overdraft their account, so this is not relevant for them,” she notes. “For those 15 percent who use it once a year or once a month, it’s very relevant. They need to make a decision consistent with their lifestyle.”

The penalty for not grabbing members’ attention and focusing them on the opt-in decision may go beyond confused phone calls. The first time members have a transaction turned down in the checkout line when they are used to having these overdrafts covered, “they’re not going to get mad at the regulators,” Kline warns. “They’re going to get mad at their financial institutions.”

But for credit unions that do a good job educating members about this decision, there’s another opportunity—to sign on new members, to open checking accounts for existing members and to activate dormant checking accounts of members who are upset with their other financial services provider over their handling of overdrafts from e-transactions.

One effective strategy for upping the response rate is to give members multiple ways to respond, encouraging them to opt in or out via mail, phone or electronic means. Offering an incentive to respond, such as reward points, is another option, though credit unions must take care to ensure they reward members equally for opting in or out, Kline cautions.

“You wouldn’t want to offer a reward just for saying yes, but you can incent members to make a decision,” she explains. “Just going through the education piece and responding is the action that earns the reward.”

And whichever choice members make, their response is important to maintaining cordial relations. “It will be a lot easier to deal with members who were informed and made the choice to opt out,” if they call with questions or complaints about an e-transaction being declined, Kline suggests.

Far-Reaching Impact

Even credit unions that have not offered overdraft protection for shortfalls resulting from electronic transactions should assess how the new regulations might affect their response to occasional overdrafts that stem from debit card holds at the gas pump, for example. Unless members opt in, the credit union cannot charge an overdraft fee for these transactions.

“If any credit union feels this isn’t going to affect them, they’re misguided and misinformed,” says Paine, who recommends that credit unions seek advice on complying with the new regulations from reputable, knowledgeable firms. “Now is not the time to go it alone.”

Some financial institutions are assuming the new regulations don’t apply to them because they never advertised or fully disclosed their courtesy pay program in the past. “All of this fuss is about the fact that these financial institutions never ran their programs with full disclosure,” Paine contends. “Their hearts are in the right place, but they’re going about it wrong.”

Credit unions should also be looking for ways to build greater transparency into the identification and handling of overdrafts, Moebs recommends. Building alerts into their processing system to notify members promptly via e-mail or text message that their account is overdrawn and to ask how they want to respond will head off complaints from members who didn’t opt in but are surprised that the credit union doesn’t still provide this service automatically.

Training front-line staff to respond to member questions and complaints is another crucial task. Some members will miss every opportunity to opt in and call to complain the first time they can’t get cash from the ATM or use their debit card at a store. Others may call to complain about fees imposed by mistake (when the gas station puts an automatic $60 hold on a $40 tank of gas, for example) or because the merchant forces through a debit payment even though the account is overdrawn.

That latter “force pay” situation can happen even at credit unions with policies not to permit ATM withdrawals and debit transactions that would overdraw an account, Moebs says. In either case, call center and branch employees need to be trained to apologize and promptly refund the fee. If a merchant forces through a payment, the credit union can’t charge for covering the overdraft unless the member has opted in.

The cost of charging overdraft fees in violation of the new regulation may go well beyond loss of member goodwill, Moebs adds. Reg E is one of only two federal regulations (the other is Regulation Z, which enacts the Truth in Lending Act) that permits consumers to take private legal action against financial institutions for violations. That’s just one more reason why credit unions need to engage all their departments—from operations, to marketing, to training, to the legal staff—to ensure they are in compliance with the new rules.

Gaining Share by Lowering Fees

With such great demand for this service—33 million Americans pay for overdraft protection in some form—“the world of overdrafts is not going away,” he says. “That’s like saying, ‘A year from now, no cars will be allowed on interstate highways.’”

However, credit unions could lose a significant share of this business if they don’t bring their fees in line with competitors, Moebs warns. Almost 60 percent of people who pay for overdraft protection, about 19 million Americans, prefer to turn to payday lenders rather than rely on their credit unions and banks to cover occasional overdrafts.

Moebs $ervices surveys the field several times each year, anonymously monitoring the overdraft prices of 2,000 banks and credit unions, 350 retail merchants, and 400 payday lenders.

The average in the most recent survey is a $35 fee by big banks and $25 for credit unions—to cover a range of overdrafts, the median of which is $40—compared to $17.25 for payday lenders (the average two-week rate for a $100 loan).

While payday lenders’ rates can get exorbitant as the amount borrowed or length of loan increases, they offer a good deal for borrowers who promptly repay a small loan—without the risk of bouncing a check—in comparison with the overdraft practices and fees of many banks and credit unions, he contends.

In other words, while the horror stories of high-priced payday lending rival or outdo those tales of $35 lattes, many people maintain the perception of alternative lenders as friendlier to do business with and cheaper than their traditional counterparts.

If credit unions want to carve out a larger share of that business, they need to drop their overdraft fees below $20, Moebs recommends.

By doing so in concert with their opt-in campaign, they are more likely to see significant buy-in—and the potential to bring in new checking accounts.

He cites the experience of a large eastern credit union that reduced its overdraft fee from $24 to $12; the result was a 16 percent increase in overdraft volume, fueled in part by existing and new members moving their checking accounts from other financial institutions with much higher fees.

“If they want to gain members’ consent and take business away from the big banks and payday lenders, credit unions must get their overdraft fees below $20,” he says. “The marketplace is setting the price.”

Future Rests With Debit

Though the deadlines for complying with the new Reg E rules are this summer, Kline adds that credit unions will be dealing with these rules on an ongoing basis as members encounter a problem down the road and open new checking accounts.

Moebs predicts that continued upgrades in payment processing networks will have implications for overdraft protection in the near future. Processing will occur so quickly that debit card users will be informed automatically at the checkout counter that their account has insufficient funds, and they will be given the discreet option to authorize an overdraft payment immediately.

“Card issuers will have new opportunities through technology for revenue production” as a result of the near-elimination of the grace period brought about by Check 21, he says. “That’s one way card issuers may be able to make up revenue lost as a result of the Credit CARD Act.”

With Americans catching up with the rest of the world in moving toward electronic payments, credit unions need to ensure they comply with the Reg E focus on debit card transactions, Moebs adds.

As the number of paper check transactions continues to decline, debit cards are fast becoming the payment vehicle of choice, moving from 24 percent of noncash payments in 2006 to 33 percent in 2009.

By 2020, he projects, we’ll be making half of all payments by debit card.

Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, based in Stoughton, Wis.