UW Credit Union CEO talks cutting overdraft fees and equitable banking
Written by Lucky Wilson | KGTO Writer on August 11, 2022
When UW Credit Union decided last year it was going to cut its overdraft fees, it got the attention of others in banking and officials in Washington, D.C.
UW Credit Union CEO Paul Kundert was called before the House Financial Services Committee to talk about how that change has impacted the credit union.
“It provided us a chance to share our story and our thinking on overdrafts and how they affect consumers and what we experienced by reforming,” Kundert said. “This is something we feel passionately about.”
Kundert recalls one of the committee members asking him “how can you afford to do this?”
“We are able to acquire more checking accounts, we are able to retain more accounts,” Kundert said of the change in policy.
“We have 35 to 40% more checking accounts than the next largest credit union in Wisconsin. We have seen a business reward of people keeping our accounts with us longer and attracting more accounts because of our fair treatment.”
‘A lot of money at stake’
But Kundert understands why some institutions might be reluctant to make such a change.
“There’s a lot of money at stake for these financial institutions with fees, billions of dollars a year and it’s significant income,” Kundert said. “You can imagine institutions are reluctant to voluntarily make some changes to reduce their bottom line, or potentially, could.”
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Kundert talked with the Journal Sentinel about the impact of lowering the overdraft fees and other areas for change in banking.
Question: What has UW Credit Union seen when it comes to overdraft fees and the shift when it comes to changing that one banking policy?
Answer: We were an institution that led on this early on. Back in 2009, overdrafts created by debit cards really surged and the banking regulators were concerned about how much consumers were paying in debit card overdrafts, so they updated their regulations.
Basically, it said that consumers had to opt in to pay debit card overdrafts. So throughout the end of 2009 you saw a lot of financial institutions asking consumers to sign a form saying, ‘I agree to pay debit card overdrafts.’
That development really prompted us to really think deeply about this and say ‘That’s not good for consumers and we’re not going to do that.’ So we reformed our overdraft practices back in 2010. We saw a significant reduction in overdraft income and we felt good about ourselves, but then as we started thinking more and reading more about equity in 2020, it led us to look at our overdraft practices again and in July 2021 we cut our remaining overdraft fee from $30 to $5.
Other institutions did the same in the summer of 2021 and have, even in the last few months, continued to announce changes to their overdraft programs.
Q: If you’re charging someone extra for taking out money they don’t have, you know they’re in a bad financial situation, but knowing that banks have that revenue coming in as part of their bottom line, the conscious choice to reduce that level of revenue coming in is a difficult decision to make, from a business perspective.
A: I think so. And you’re right, you have awareness that someone needs credit desperately to use this service. That is one thing that is somewhat unique to the banking business, the intimate knowledge you have about the consumer’s financial situation.
If you walked in to buy groceries, the grocery store doesn’t know how desperate you are for the food and you wouldn’t expect them to adjust prices based on that knowledge. But in the banking world, you have some insight into people’s needs.
And when people are desperate for credit, historically, we’ve seen they’re willing to pay prices that are unfair but necessary to support what their need is.
It isn’t an easy decision to choose a path where you’re, at least in the short-term, accepting lower revenue.
I do think, personally, there is a business case to reform overdrafts. I just don’t think any business is sustainable in the long term if they’re harming the well-being of their consumers. Excessive overdrafts are certainly harmful to the well-being of consumers. I don’t think there’s any dispute about that.
Q: What are some other policies that can be amended that would follow in the same spirit of the overdraft changes?
A: One that comes to mind that we’re committed to and have been, is in auto-lending. We’re one of the state’s top auto lenders, but we have a firm practice of offering the same interest rates whether you come into our office, or an auto dealer helps you with the loan, And other lenders will allow the auto dealer to increase the interest rate if they can negotiate that with a car buyer and then keep part of the income of the higher interest rate.
The Consumer Financial Protection Bureau did some analysis of that (practice) some time ago and said that tends to have a disparate impact because women and minorities end up paying more for credit empirically than other car buyers and borrowers. That’s another area where we said we’re not going to do that.
We have great auto-lending rates, but they shouldn’t be negotiated, they should just straight up be offered to people and we want to make sure everyone is getting the best rate that we can offer and not paying more simply because they weren’t as educated or didn’t understand that they didn’t have to accept that rate.
Q: Have you gotten any pushback from other financial institutions?
A: Not directly. I’ve heard indirectly from folks saying ‘What are they doing? Are they crazy? That’s a lot of money.’
But I have heard directly from a number of other credit union spokesmen that have said, “We’ve read some of the stuff you’ve written, it’s got us thinking and we’re going to make an adjustment too.”
I do think there will be some real changes coming, not just in Wisconsin but across the country, so I’m encouraged by that. There certainly are other institutions taking a wait-and-see (approach). Waiting to see if it seems to matter with consumers. Waiting to see if the regulators start pushing back more on their pricing and business approach.
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