Avoid Regulatory Scrutiny and Thrive in the New Year
By: John M. Floyd, Chairman and CEO of John M. Floyd & Associates
As the prospects for more robust interest rates, improved loan volume and an easing of regulatory scrutiny remain uncertain going into the New Year, credit unions continue to face the dilemma of how to improve margins, maintain compliance and provide services that will keep them competitive.
As non-interest income sources have diminished, some financial institutions have been driven by the temptation to try new – sometimes risky – strategies for increasing revenue. But on-going regulatory scrutiny and consumer complaints regarding rising service fees and non-disclosed financial products and processes should be strong signals that these ideas are no longer part of a wise business plan.
In fact, since 2010, regulatory and legal scrutiny has increased on virtually every consumer financial product on the market. As a result, large national banks have paid hefty fines for implementing practices that increase consumer costs.
Provide value and service to keep your members loyal
In today’s environment, a more reliable success strategy can be established by making a strong connection to your members’ financial needs and expectations, and providing value in the form of reasonably-priced, user-friendly products that are completely disclosed. Taking the time to learn what products and services your members want and need can result in stronger existing relationships, lead to new business opportunities and set your community-based institution apart from the big national banks in a favorable way.
Case in point: In a study by research firm Chadwick Martin Bailey, 85 percent of survey respondents indicated that they received value from their credit union vs. only 56 percent for large national banks. As a result, credit union members report having the most long-term relationship with their financial institution when compared to other banking categories.
As economic conditions continue to affect the financial well-being of many consumers, providing your members with a strategy – such as an overdraft privilege program – that helps them to better manage their money can be a valuable benefit to them and can generate much-needed income for your credit union. But, make sure your practices do not pose financial hardship for program users.
Attention to consumer protection is the key
The key to avoiding potentially costly legal scrutiny is to provide your members with a clearly defined overdraft program that guarantees full regulatory compliance and consumer protection expectations, including:
- complete transparency regarding fees and information about how the program works;
- reasonable, communicated overdraft fees;
- clearly established overdraft limits;
- transaction clearing policies that avoid maximizing member overdrafts and related fees created by the clearing order;
- the ability to easily monitor excessive usage; and
- communications materials that outline alternative financial products that more appropriately fit the needs of excessive overdraft users.
When supported by easy-to-understand disclosures and counseling on appropriate usage, such programs provide informed members with a valuable resource to better manage their finances.
There’s no such thing as almost compliant
In the new regulatory reality, there is no room for guessing. If you’re not sure that your overdraft program is in line with new compliance and consumer protection guidelines, ask your provider the following questions:
- Do our transaction processing policies increase member costs?
- Do our disclosure materials provide clear descriptions of our program terms and fees?
- Do our marketing materials accurately explain our opt-in processes for electronic transactions, as well as the opt-out procedure for checking and ACH transactions, and how to avoid overdraft fees?
- Do we provide account holders with information about alternative, less expensive products that might be better-suited to their short-term credit needs?
When implemented and managed correctly, a fully compliant overdraft program will provide the most benefit for your members and your institution. Such a resource will be helpful going into a New Year of uncertainty.
John M. Floyd & Associates (JMFA), a Preferred Business Partner of the Missouri Credit Union Association, is a leading provider of profitability and performance-improvement consulting. For more than 30 years, JMFA has been recognized as one of the most trusted names in the industry, helping financial institutions enhance their bottom line with programs like JMFA Overdraft Privilege®. JMFA is also recognized for earnings enhancement and expense control programs, training, executive placement, account acquisition programs as well as product, service, pricing and technology-improvement consulting. Simply stated, JMFA’s programs and services are designed to increase income or reduce expenses. JMFA is proud to be a preferred provider among many industry groups. For more information, contact Paul Dacus, JMFA regional director by email or call at 913.827.7140.