Overdraft Privilege: An Account Feature to Consider?

By Tom Dunn
Editor, The Point for Credit Union Research & Advice
Credit Union National Association

For consumer oriented financial institutions, there is no doubt that the checking (transaction) account is the focus of any strong relationship with consumers and the key to being their primary financial institution (PFI). And for young members in particular, this includes the ancillary services to a checking account including debit/ATM cards, ACH transfers and Internet banking services.

Credit unions have consistently led financial service providers in offering free checking account services to their members and either free or less costly ancillary services.

However, over the past six years, the percentage of banks that offer free checking to their customers--once a significant differentiator for credit unions--has increased dramatically. According to the 2004 Credit Union Fees Survey from CUNA’s Center for Research & Advice, 57% of banks now offer free checking. And it’s probable that this percentage is even higher among community banks and thrifts. At 74%, credit unions still have an edge with free checking, but banks are quickly eroding this competitive advantage.

A consequence of increased competition for checking accounts is an increased competition to offer other amenities and conveniences with these accounts, aimed to not only differentiate between institutions, but generate fee income in lieu of direct checking account charges.

One of these account features is overdraft protection, also known as "bounce protection" or "courtesy pay." This refers to when a financial institution chooses to cover transactions drawn on a checking account with insufficient funds. This service protects consumers from the embarrassment and expense of having items or transaction "bounced," or returned unpaid.

A new "E-Scan Insight Series" report from CUNA’s Center for Research & Advice entitled Checks & Balances: Credit Unions and Overdraft Privilege Programs reveals that most credit unions that offer overdraft privilege programs do so primarily as a member convenience, with a relative few citing increased fee revenue as the main reason for offering the program.

As the report explains, checks and other transaction account devices are, and will continue to be, major payment methods for consumers, thus points of competition between banks and credit unions. CUNA’s survey provides a first look at the overdraft protection environment and how credit unions are structuring and implementing their overdraft privilege programs. Findings suggest that overdraft privilege is a program that when implemented with best practices in mind, can be a positive and valuable account feature for those members who may need it.

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