By Ray Birch
LAKE FOREST, Ill.—Fee income at financial institutions is down across the board, with interchange revenue taking a big hit, and the experts are recommending credit unions adjust their strategies—now.
While credit unions are making the calculated decision during the pandemic to waive fees they control, such as overdrafts, interchange loss
es are being controlled by the new no-contact environment and the reduced number of purchases being made, driving down the number of credit and debit transactions.
“Swipe fees, or interchange at depositories, are taking a hit. Depository fees are down about 15% across a broad spectrum of fees,” stated Michael Moebs, economist and CEO at Moebs $ervices. “The drop in fee usage includes everything from overdrafts, new loan fees, deposit fees—such as fees for falling below minimum balances—and even cashier’s checks.”
Normally, consumer fee revenue accounts for about 20% of the net operating revenue at a bank and almost three times that percentage for credit unions, Moebs stated.
Curtailed Activities
“Half of depositories’ fees (59%, see chart) come from swipe fees, as the American consumer loves to swipe for purchases five times more than paying with cash or check,” said Moebs. “Three out of eight dollars comes from overdraft fees. Most people do not know how expansive the payment system is with billions of dollars of value being paid daily across the nation. Yet payment activity is substantially curtailed with consumers forced to remain at home.”
Norm Patrick, VP of Advisors Plus Consulting at PSCU, told CUToday.info the company’s aggregate same-store data shows debit card transactions have been significantly impacted by the COVID-19 pandemic.
“At its lowest point, the week ending March 29, debit card transactions were down 25% year over year,” Patrick said. “We have observed steady improvement over the past several weeks, with our most recently reported week, ending May 3, showing debit being down 10% year over year.”
Michael Moebs
Time to Get a Grip
Credit union leaders need to get a better grip a changed environment that will likely persist—at varying levels—as long as the pandemic continues, said Brian Scott, chief growth officer at PSCU.
“Interchange makes up 30% of a credit union’s total profitability on the credit side. On the debit side, it's 80% or 90%,” explained Scott. “And if you look at non-interest income for a credit union, overall interchange is one of the biggest components. Interchange is one of the most important things that's driving the overall income of the credit union. It's probably one of the top two or three things a credit union should be focusing on now, behind just managing the overall risk of the institution.”
On the positive side, since the onset of the pandemic PSCU has seen its credit unions experience a significant increase in average debit card transaction amounts.
“The improvement in debit card spend has been more pronounced since federal stimulus payments have been arriving in cardholders’ underlying checking accounts,” said Patrick. “For the past three weeks, we have observed year-over-year growth in debit card spend in the 6% range. Since debit card interchange revenue is driven directly by debit card spend, this has been good news for our PSCU credit unions.”
The Sustainability Question
Another important lever in debit card growth is the growth in underlying checking accounts, noted Patrick.
“In the pre-COVID environment, we observed that approximately 40% of debit card spend growth is driven by growth in new checking accounts,” said Patrick. “It’s now a good time to leverage marketing resources to encourage consumers to become credit union members and open a checking account.”
Patrick added what remains to be seen is sustainability.
“With federal stimulus payments eventually being fully utilized and the eventual termination of the federal subsidy on unemployment payments, there could be a new wave of drag,” noted Patrick. “However, we may see some degree of offset with business reopenings and potential for cardholders to return to some degree of normalcy with their spending patterns. Again, this all remains to be seen.”
Time to Get Creative
Brian Scott
Moebs emphasized it’s time credit unions find new ways to encourage card transactions. He suggested sending members a list of business members that provide services over the Internet, and at the same time encourage members to use their debit cards more often, placing $5 in their checking account for 30 debit transactions, for example.
“It’s time to get creative,” Moebs suggested.
Scott said there is an opportunity to slow, and possibly reverse the impact the pandemic is having on interchange revenue.
“Now is one of the best times ever to look at how do you change your members’ spending patterns,” said Scott, emphasizing, as he has in the past, the value of shifting debit spend to credit. “When you migrate debit spending to credit you automatically get a big bump in interchange. What's happening right now is people have stopped putting money on credit because they’re not doing things like traveling—things they normally use their credit cards for. But they can still use their credit card for things like restaurant takeout, groceries…and pay off their balance every month. This allows consumers to continue to build credit and helps the credit union acquire interchange income. Encourage, and incentivize members to use their credit card for purchases they have typically placed on debit.”
Norm Patrick
A Positive Note
Moebs added his own ultimately optimistic view. “The Depression of the 1930s and WWII are similar to this coronavirus period. Those financial institutions that not only survived but succeeded in those rough times, became innovative in pricing and creative in volume,” he said. “Payroll went from cash envelope to paycheck to direct deposit. And, charges imposed for using checks and overdrawing accounts began or advanced. Disney Studios started about the same time as the Great Depression, and just like each of us is hurting now, Disney will come roaring back. Now is the time to be ingenious and imaginative.”