Make Sure You Have the Facts About Reg E Before Discounting its Impact

John M. Floyd, Chairman and CEO, John M. Floyd & Associates
August 4, 2010 | COMMENTS

In a survey conducted by The Nielsen Company in March of this year, 2,013 respondents weighed in on the likelihood that they would opt in to an overdraft program. Of the consumers surveyed, 26 percent said they would opt in; 22 percent would not and a majority; 39 percent, were undecided. The top two reasons cited for the indecision? Respondents didn't have enough information about Regulation E and they had no idea there was an option to opt-in.

Similarly, some financial institutions are choosing not to bother with an opt-in strategy because they don't think they will be impacted by the restrictions imposed by Reg E's ruling on paying overdrafts on ATM and one-time debit card transactions. Or, they have decided that they will just “take the hit” because they don't believe it will have much of an effect on their bottom line.

Unfortunately, this strategy could lead to a loss of as much as 60 percent of NSF/OD income caused by force pay or pre-authorized debit transactions. If your debit card network rules require your credit union to pay an authorized debit card transaction that overdraws a member's account and you don't have permission to charge a fee for that service, you will be impacted by the loss of force pay income. 

There are many misconceptions about the full impact of Regulation E. Following are three common scenarios that demonstrate how the loss of force pay income can happen and create a negative impact on your credit union:

With the latest news of an additional $1 billion assessment by NCUA to shore up the corporate stabilization reserves along with pending legislation on interchange fees, it is more important than ever to make sure your credit union has alternative sources of non-interest income to remain viable. An overdraft privilege program can make a substantial impact to your bottom line and provide a valuable service to your members; which takes us back to the Nielsen survey.

The top reasons 26 percent of the respondents indicated that they would opt in to an overdraft program were:

• to be covered in case of an emergency situation or unexpected expense;
• they have multiple users on their card and don't always know their balance; and
• they want to avoid embarrassment at the check out.

Take the time to educate your members about how opting in to overdraft coverage provides them with a convenient, reasonably priced service that helps them make informed decisions about their finances and is a service they only pay for when used. As the survey indicates, there are a substantial number of consumers who aren't aware of the need to opt in for overdraft services and quite a few more who would be interested in a program that gives them financial stability.

There is still much confusion in the marketplace about the implications of new regulations and legislation. But, you know that your members expect you to provide the services they need to maintain financial stability. And, you know that your credit union needs a strong bottom line to compete in the marketplace. A disclosed overdraft program can be a real benefit for both your members and your institution.

John M. Floyd & Associates (JMFA) is a profitability and performance improvement consulting firm, serving more than 2,000 financial institutions in all 50 states. To learn more, visit www.jmfa.com or call (800) 809-2307.