By Ray Birch
LAKE FOREST, Ill.—Walmart’s GoBank account is a serious threat to credit unions, say several analysts, including one who is predicting that of the three-million accounts Walmart will add within a year, an astonishing two-million will come from CUs if changes aren’t made.
That will be the damage if CUs don’t react soon to the new low-cost mobile product that allows consumers to make purchases with a debit card or smartphone and does not allow overdrafts, said Michael Moebs, economist and CEO at Moebs $ervices. “If you are an average-size credit union and have branches within a couple miles of a Walmart or Sam’s Club store, you will lose at least 1,500 share draft accounts per office, maybe more.”
Where several analysts told CUToday.info they see the threat from GoBank, offered through Green Dot's regulated banking unit, is in the changing payments mindset more so than low price—more consumers are choosing to ditch their checkbook for an online account and they don’t want to pay overdraft fees.
Experts, too, say that shift sends a message to FIs that if they are relying on overdrafts they are living on borrowed time.
But those same analysts are proposing several strategies for battling Walmart, including adding an account that does not permit overdrafts and instituting stronger relationship pricing. The most important step, however, is to get moving now, especially since GoBank appeals to the younger consumer who relies on electronic services.
Moebs thinks credit unions are the bigger target because GoBank will have the greatest impact on free checking. “Banks in the last four years have been moving away from free checking in favor of relationship pricing,” explained Moebs. “Credit unions have maintained their level of involvement in free checking.”
About 79.6% of credit unions offer free checking, compared with only 47.9% of banks, according to a recent Moebs $ervices study.
Wake-Up Call
Bob Giltner, CEO at R.C. Giltner Services Inc. in Louisville, Ky., called the entry by Walmart a “final wake-up call” to credit unions to pay attention to a trend that has been occurring for more than a year.
“In this new digital world there is a demand for a no overdraft fee account, which includes reloadable prepaid,” said Giltner. “This has been a booming area—perhaps one CUs have not been keeping an eye on—that has been somewhat insidious in taking transactions from credit unions.”
Odysseas Papadimitriou, CEO of WalletHub and CardHub, Washington, said there is a fast-growing consumer segment that never wants to overdraw their account. “This Walmart account fills a legitimate need and makes a lot of sense. Many banks and credit unions are resisting this kind of account because overdrafts make them a lot of money.”
With mobile banking taking off and many options for consumers to pay at the point of sale, Giltner said adding a no overdraft fee account will help credit unions remain “at the top of the food chain as opposed to the bottom. Would you rather let a segment of your members buy a prepaid card, use an alternative payment method that might settle to the credit union in a very low-value way, or even take money out and put it on a Starbucks card?”
Giltner likened what is taking place today with checking to what occurred with CDs when the digital era arrived. “Just like individual songs are no longer tethered to a CD, transactions are no longer tethered to an account,” he said. “Credit unions need to get all those transactions related to that member to settle with them in the best possible way.”
Like several analysts, Giltner reminded that a no overdraft account is an addition to the CU’s current checking line and that a segment of the membership still wants overdrafts.
No ODs, Say Consumers
Behind the growing demand by consumers for a no-overdraft account, experts say, is the payments system speeding toward real-time settlement.
“Electronic payments is what is changing minds here,” said Giltner. “As a result, this has created a different market segment. I grew up in a time when it was a great value for banks to cover a check for me. But my daughter, who is 28 and has never written a check to a merchant, would rather be declined at the point of sale and pull out another payment method than have money taken out of her account she did not plan for.”
Pointing to a recent WalletHub study that shows CUs offer higher interest rates and lower fees on checking, Papadimitriou recognized that credit unions have better checking offerings than banks.
“But their problem has been marketing,” said Papadimitriou, who added that website testimonials from members about the CU’s checking offerings help boost conversion rates.
“Besides being challenged to market with the big banks, credit unions must build an alternative checking product, one more like GoBank or (American Express’) Bluebird—take away the checkbook and overdrafts. Because if you are relying on overdraft fees you are living on borrowed time.”
Moebs suggested that credit unions maintain free checking, continue to allow overdrafts, offer at least one account using paper checks, have joint accounts for all checking, allow account openings online or in-person, accept deposits from any depository or legitimate source, pay interest on at least one checking account, and add reloadable prepaid.
“Using basic pricing techniques, such as relationship pricing, there are ways to counter Walmart checking,” said Moebs. “Avoiding conditions on fees, balances or rates is another approach.”
He also recommended not using the term “checking account.”
“Credit unions have to recognize that with free checking they have a superior transaction product,” said Moebs, who emphasized that in many countries outside the U.S. FIs use “transaction account” as the term for their checking products. “Credit unions have to realize that free checking is a transaction account in disguise and that they have to at minimum break even on the product.”
Banks Have Most To Lose
But former NCUA Chairman Dennis Dollar, now principal at Dollar Associates in Birmingham, Ala., contends banks have more to fear from Walmart than credit unions.
“Remembering that the average credit union has less than 50% penetration of its members into its share draft account, I actually believe credit unions have room to grow in the checking account arena,” said Dollar. “I would say that those most at risk are banks with credit unions nipping at their heels for checking accounts, as well as Walmart, Apple, Google, Amazon, PayPal and the like.”
But that does not mean credit unions should not pay close attention to Walmart, said Dollar, who recommended that attention to checking threats should be spread among many new players.
“Walmart getting into the checking business is just one more credit union challenge, along with Apple, Google, Amazon, PayPal and others wanting a piece of the payments pie,” said Dollar. “Each of these competitors will take a while to gain momentum, as consumers don’t necessarily look to the same source for a checking account as they do to buy a pair of socks in the store or a book online. But, over time, they will each eat up another piece of the marketplace for checking accounts and payments that credit unions need.”
Meanwhile, to meet this growing challenge, Dollar said CUs will have to “gear up” with stronger checking products and more relationship-based pricing to “make consumers hesitant to take their account from the credit union because it is tied to a low-cost credit card, car loan or mortgage.”
But Moebs said the pressure is on CUs today—not only from the structure of Walmart’s offering, but from the retailer’s message.
“Credit unions have more to fear than banks,” said Moebs. “Walmart is saying ‘Don’t trust your bank, trust Walmart,’ which goes right at the heart of credit unions.”