While credit unions are quite optimistic about the outlook for their business and the economy in the year ahead, there’s one area that they’re remarkably pessimistic about: Their future regulatory burden. The National Association of Federally-Insured Credit Unions’ (NAFCU) Credit Union Sentiment Index (CUSI) recorded the lowest sentiment point on record in its January 2021 survey.
Priorities are surely changing, as the Consumer Financial Protection Bureau (CFPB), the White House and Congress are now very favorable to consumer protection. CFPB Director nominee Rohit Chopra has already stated the agency plans to reverse policies that weaken enforcement and supervision, and its Taskforce Document outlines consumer empowerment, disclosures, financial inclusion and civil penalties as priorities. If Chopra is confirmed, we will most certainly see the CFPB step up its penalties and enforcement. In Congress, consumer protection-oriented legislation that Democrats previously proposed, like the Stop Overdraft Profiteering Act (SOPA) of 2019, may be resurrected with new bills containing even more stringent guidelines under this administration.
It is also important to consider that this increase in regulatory enforcement is coming on top of an existing wave of litigation, where class action lawsuits against credit unions are growing every day, resulting in tens, sometimes hundreds of millions a dollar a year in settlements. Financial transparency is a hot target. In one case, the judge ruled that a credit union failed to act in good faith as it related to their overdraft program. In another, one of the largest credit unions in the country paid out $16 million on one settlement that was initially based on a complaint from a single customer related to deceptive practices in assessing non-sufficient fund (NSF) fees.
We don’t know exactly what future regulations, legislation or litigation might bring, but we know enough to start preparing. It’s not all bad news because, ultimately, maximizing consumer transparency helps credit unions further their mission to support their members. The trick is going to be to minimize the operations impact, and that takes strong planning and swift action.
By making smart moves now, credit unions and members can both win in this new environment.
Minimizing the impact to operations: an illustrative case
Let’s look at the potential impact of legislation like SOPA 2019 as a model for how credit unions can begin looking at the regulatory changes needed to improve consumer transparency in a world of increasing disclosures and enforcement. In a nutshell, this legislation proposed massive overhauls to current overdraft programs to protect consumers from excessive fees and vague language. This approach could essentially wipe out credit unions’ number one source of non-interest income: Non-Sufficient Funds (NSF) fees. The main reason I want to use this legislation as an illustrative case is that it requires prompt notification to members when overdraft is used—making the challenges of implementing Dodd-Frank in 2010 look like a walk in the park. It is also interesting to note that similar pieces of this legislation were originally proposed in both the House and the Senate, versus originating in the House and moving to the Senate, which indicates how hot of a priority this is for both legislative bodies.
The potential impact of legislation like SOPA falls into three main categories: technical, human and financial impact.
First, the technical impact. Almost every single core would need adjustments to its checking account structure to account for new fee structures. Alerts and notifications would also need to be added or adjusted, which is much more feasible but still not a normal event. Lots of testing would be needed here. Credit unions would also need to ensure that the right data could be extracted from their current systems, which could mean upgrades are needed.
The two major factors to consider when it comes to the technical impact of potential regulations are cost and timeliness. Of course, the two are closely intertwined. When SOPA 2019 was proposed, there was a one-year time window for financial institutions to implement these significant changes before fines started kicking in. That’s not likely to change given the urgent need for financial recovery from the pandemic and the desire for the new administration to begin showing progress on its agenda. That could have major implications for credit unions’ existing technology roadmaps and make prioritization a challenge. This timeliness factor will also increase the already significant costs credit unions will face in upgrading their own operations. Plus, cores will likely pass down upgrade costs to their credit union customers over time.
The second category is where the lift gets even heavier: the human impact. Every single financial institution would have to notify its customers about changes. Call centers would be flooded. Credit unions will need to train front-line staff, retrain the collection department and help reset members’ expectations about how overdraft processes work. What’s more, credit unions would need to put new processes in place to document and track all NSF-related communications. This is yet another significant lift, because close management and audits would be needed to ensure compliance. For example, any time credit unions update their disclosures they need to document the process extensively and file for regulatory approval.
This would be a totally different environment that will require credit unions to leverage specialized experts in NSF in order to successfully change their practices. Why? The audits. This is a good gauge for credit unions to think about how ready they might be for these types of changes. If a regulator came into your credit union today to audit your NSF practices, would you pass? Most credit unions would need to implement detailed and extensive change management programs to do so, especially in a heightened regulatory environment.
Finally, we face the financial impact. The good news is that members could be paying fewer overdraft fees. However, they may face higher fees from places where they bounce payments, not to mention late fees. It’s all bad news for credit unions, which could face a 30-50% drop in NSF income on top of the labor cost of all the technology improvements needed to account for the new requirements outlined in the legislation. Now we see why regulatory outlook sentiment is so low on the CUSI—this hits where it hurts.
An opportunity to maximize the benefits to credit union members
There is good news. Despite the challenges credit unions may face while implementing processes to address new regulatory requirements, this is an opportunity for credit unions to showcase just how member-centric they can be. By investing in the right technology resources now, credit unions can be prepared for change and help members maximize the benefits of new potential legislation. They can also explore where they can add new value in this new dynamic—adding new services that could help lessen the financial impact of regulatory overhead. Being proactive and prepared would help to minimize the effect on revenue-driving programs already on the technology roadmap, or perhaps even combine some efforts for greater efficiency and financial impact.
At a minimum, we know disclosures are going to be more important under the new administration. So what credit unions need is a technology solution that automatically notifies members of any overdrafts and tracks all communications, relieving credit unions of a heavy burden and significant cost and upkeep. The choice credit unions face now is whether to build or buy their own solution. Unfortunately, the timeliness of new potential legislation makes this a risky choice. You could throw all of your resources at the challenge and it still might not be done quickly enough—never mind the effect on your other programs.
This is where fintech partnerships can help. Unfortunately, credit unions’ confidence in fintech partnerships seem to be at a low point. According to Cornerstone Research, fewer credit unions rank fintech partnerships as very important compared to last year. The 2021 Digital Banking Report shows that 41% of smaller banks have no plans to partner with a fintech firm in the near future, though only 10% of larger banks state that to be the case. This places smaller banking organizations at a tremendous disadvantage, especially now but also in the years to come. Fintechs can bring both speed and innovation to financial institutions of all types and sizes, and this is especially important in this regulatory environment.
Part of the reason for this sentiment could be that many fintechs are great at the tech piece, but not so much at the financial—specifically, the banking—piece. When looking for a fintech partner, especially in this regulatory environment, you need a technological solution built on a strong foundation of domain expertise. Seek a fintech partner that truly understands the risks associated with the challenges ahead of the credit union industry. They should have a team of domain experts working alongside their technology experts.
Credit unions have a lot of reasons to be pessimistic about the current regulatory environment. Still, that is no reason for inaction. By getting proactive and reconsidering how a fintech partnership could help navigate what will surely be a challenging few years will do a lot more than mitigate the potential impact of upcoming legislation. It will position credit unions to adapt to change much more quickly and stand out as member-centric and proactive.
About the Author
Joel Schwartz is the Founder & Co-Chief Executive Officer of DoubleCheck Solutions, a financial technology company with an innovative solution that delivers new revenue for Financial Institutions while giving customers and small businesses more transparency and control in the event of Non-Sufficient Funds (NSF).
Joel spent more than 20 years as a banking executive, serving as a Senior Vice President and Regional Manager at First Bank and a Branch and Cluster Manager for Downey Savings. For over a decade, Joel taught Niche Marketing and Market Share Growth at UCLA Extension. His experience enabled him to see the need for a company that empowers customers to make their own financial choices, build a great credit score and protect themselves from fraud. To meet this need, Joel founded DoubleCheck in Burbank, California in 2013. The company is now poised to help banks and credit unions rethink the industry’s outdated banking practices in the face of unprecedented economic, regulatory and legal challenges.
Joel earned a bachelor’s degree in business administration and finance from San Diego State University.