When UW Credit Union decided last year it was going to cut its overdraft fees, it caught the attention of other banks and officials in Washington, D.C.
UW Credit Union CEO Paul Kundert was called before the House Financial Services Committee to talk about the impact of this change on the credit union.
“It gave us the opportunity to share our story and our thinking about overdrafts and how they affect consumers and what we’ve been through while reforming,” Kundert said. “It’s something that excites us.”
Kundert remembers being asked by one of the committee members “how can you afford to do this?”
“We’re able to acquire more checking accounts, we’re able to retain more accounts,” Kundert said of the policy change.
“We have 35-40% more checking accounts than the second largest credit union in Wisconsin. We’ve seen a business reward from 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 that’s a big revenue,” Kundert said. “You can imagine institutions are reluctant to voluntarily make changes to reduce their bottom line, or might.”
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Kundert spoke with the Journal Sentinel about the impact of lower overdraft fees and other areas of change in the banking industry.
Question: What has UW Credit Union seen in terms of overdraft fees and change when it comes to modifying this banking policy?
Answer: We were an institution that led this project from the start. In 2009, overdrafts created by debit cards really increased and banking regulators were concerned about how much consumers were paying in debit card overdrafts, so they updated their regulations.
Basically, he said consumers should choose to pay overdrafts by debit card. Thus, throughout 2009, many financial institutions asked consumers to sign a form saying, “I agree to pay debit card overdrafts.
This development has really made us think deeply about this and say, ‘This is not good for consumers and we’re not going to do this.’ So we reformed our overdraft practices in 2010. We saw a significant reduction in overdraft revenue and felt good about ourselves, but as we started to think more and learn more about equity in 2020 , this led us to review our overdraft practices. and in July 2021, we reduced our remaining overdraft fee from $30 to $5.
Other institutions followed suit in the summer of 2021 and have, even in recent months, continued to announce changes to their overdraft programs.
Q: If you charge someone extra to withdraw money they don’t have, you know they’re in bad financial shape, but knowing that the banks have that income as part of their bottom line , the conscious choice to reduce this level of income is a difficult decision to make, from a business point of view.
A: I think so. And you are right, you are aware that someone desperately needs credit to use this service. That’s something that’s somewhat unique in banking, the intimate knowledge you have of the consumer’s financial situation.
If you walked in to buy groceries, the grocery store doesn’t know how desperate you are for food, and you wouldn’t expect them to adjust prices based on that knowledge. But in the banking world, you get an idea of what people need.
And when people are in desperate need of credit, historically we have seen that they are willing to pay unfair but necessary prices to meet their needs.
It is not an easy decision to choose a path where you accept, at least in the short term, lower incomes.
I personally think there is a business case for reforming overdrafts. I just don’t think a business is viable in the long term if it harms the well-being of its consumers. Excessive overdrafts are certainly detrimental to consumer welfare. I don’t think there is any dispute about that.
Q: What other policies can be changed that would follow the overdraft changes in the same spirit?
A: One that comes to mind that we committed to and have been is auto loan. We are one of the best auto lenders in the state, but it is our firm practice to offer the same interest rates whether you come to our office or have a car dealer help you with the loan, and Other lenders will allow the car dealership to raise the interest rate if they can negotiate this with a car buyer and then keep some of the revenue from the higher interest rate.
The Consumer Financial Protection Bureau did an analysis of this (practice) some time ago and said it tended to have a disparate impact because women and minorities end up paying more for credit empirically than men. other car buyers and borrowers. This is another area where we said we weren’t going to do it.
We have great auto loan rates, but they shouldn’t be negotiated, they should just be offered to people and we want to make sure everyone gets the best rate we can offer and doesn’t pay more just because weren’t as educated or didn’t understand that they didn’t have to accept that rate.
Q: Have you been rebuffed by other financial institutions?
A: Not directly. I indirectly heard people say ‘What are they doing? Are they mad? That’s a lot of money.’
But I’ve heard directly from a number of other credit union spokespersons who have said, “We’ve read some of the stuff you wrote, it makes us think, and we’re going to make an adjustment as well.”
I think there are going to be some real changes coming, not just in Wisconsin but across the country, so that encourages me. There are certainly other institutions that take a wait-and-see approach. Waiting to see if this seems to matter to consumers. Waiting to see if regulators start pushing their pricing and business approach further.