By Ray Birch
LAKE FOREST, Ill.—Is there a threat to the very “core” of credit unions?
Yes, a number of analysts have told CUToday.info, arguing that new rules affecting overdrafts will deeply impact the account that remains the core of most member relationships, the checking account. What do CUs need to potentially prepare for? A decline from $30 in median overdraft charges to as little as $1, one person is warning.
The implications are enormous, analysts say, as credit unions have passed the 100-million mark in total membership largely as a result of continuing to offer free checking as banks have steadily added checking charges and jettisoned customers.
To examine this potential threat, and to offer credit unions a patch forward, CUToday.info has launched a series titled “Checking on Checking: Threats & Strategies.”
Streamline Checking
Among the most outspoken in attempting to highlight the risk to credit unions is economist Michael Moebs, who asserts that as the CFBP moves to do away with overdrafts, all those free checking members will soon become a big drag on the bottom line and could jeopardize the future of the movement.
Moebs, economist and CEO of Moebs $ervices, contends that if credit unions don’t move soon to streamline their checking offerings and do away with free checking unless it is linked to having multiple relationships, the movement risks losing even more credit unions that will merge out due to poor performance.
That performance, too, could draw the attention of Congress, added Moebs.
“Credit unions could run the risk of being placed under the FDIC or the OCC,” said Moebs. “This is how serious the problem is.”
Many experts think the CFPB will soon target all overdrafts. The CFPB’s proposed rules on prepaid cards, which would re-categorize overdrafts as a loan, will eventually extend to checking and force FIs to eliminate overdrafts, sources have stated.
In play is approximately $32-billion in overdraft revenue for the entire financial services industry, said Moebs. “I am not sure credit unions see the issue like the banks do—overdrafts will fall from a median price of $30 to $1,” said Moebs.
The issue is worse for CUs than banks, pointed out Moebs, because 93% of credit unions’ service charge income comes from overdrafts compared to 77% for banks, and credit union overdrafts are coming largely from free checking, he said. “We still have close to 80% of credit unions offering free checking and only 47% of banks.”
Banks Made Wise Choice
Moebs contended that banks, wearing their black hats through much of the recession with all the new checking charges, have made a good business decision.
“Credit unions are behind the banks, who saw what was coming with free checking and took action,” offered Moebs. “The recession, 2008, hit the banks in the head like a two-by-four.”
Moebs emphasized that while banks have gotten away from free checking, they give customers ways to avoid those fees by taking more relationships. “Now banks’ checking products are at minimum break-even, and not a loss leader.”
But not all of the banks have adjusted their checking offerings, said Moebs, noting that many smaller community banks still hold the line on free checking. “We see about 30% of the banks following what BofA started.”
Moebs asserted that many credit unions don’t see the problem that’s coming, saying the credit union “help-everyone-no-matter-the-cost” philosophy is getting in the way.
“This sense of, ‘We want to help everyone.’ Credit unions have to move away from this view that the world is a cooperative,” said Moebs. “The world has moved away from that.”
The recent Moebs Overdraft Revenue Study shows that credit unions are already seeing a decline in overdraft income, for the first time in history.
CU OD Revenue Drops
Credit union overdraft income fell in 2014 by 3.9%, while it rose for banks by 1.1%. Total FI overdraft revenue ended 2014 at $31.8 billion, a year-over-year decrease of 0.31%.
According to Moebs, CUs saw a bigger loss in overdrafts than banks, because consumers are parking their money in checking during the low-rate environment. With checking balances higher, members are committing fewer checking mistakes and paying less overdraft charges.
“Credit unions appeal to the middle class and right now the middle class has their highest average checking balance since World War II,” explained Moebs.
Moebs insisted it’s time for credit unions to adjust their checking pricing and structure, eliminating free checking but giving members options to avoid the new fees, such as deeper relationships, and streamlining checking offerings down to two, possibly three accounts, to increase efficiency.
“Credit unions must control their expenses, no matter their size, and they must be paid for the value they give,” concluded Moebs. “Value equals benefits minus costs—but the credit union help everybody philosophy benefit does not cover the costs. Therefore, credit unions do not understand the value equation in what they are giving.”