By Ray Birch
WASHINGTON—With the future of overdrafts in question, including potentially disappearing at some point, credit unions should be opening their strategic playbooks now and looking at their options, says one expert, who adds that CUSO partnerships need to be near the top of the list.
“There can be a few different strategies,” said Brandy Bruyere, a partner at Honigman, LLP. “Credit unions, unlike banks, have more limitations on their investments. Banks don't have limitations. While getting creative about investment income is certainly something I see some credit unions doing, there's a few tools that that can be utilized.”
Bruyere joined with numerous other analysts who have noted that when a credit union lowers or even eliminates its overdraft fee, that loss of revenue needs to be compensated for somewhere.
“We're going to see things like fees on checking accounts,” she said. “Some of us are old enough to remember when some kind of fee with your checking account was almost standard. However, market pressures made that go away.”
Feeling the Pressure
But if credit unions move in that direction, Bruyere said they’re just swapping one non-competitive fee for another.
“It might mean not paying as much interest,” she said. “Again, we have pressure there, too, to compete with the banks.”
Bruyere said she expects one response strategy for credit unions in such a scenarios will be to begin expanding the universe of what they can invest in, scouring NCUA and state-level investment rules.
“Maybe that is an insurance CUSO. Maybe that is a title company CUSO. Maybe credit unions that are already involved in a CUSO does more with them,” she suggested. “They are going to work more with these types of relationships. They are going to think hard about what are their tools to bring in more revenue, especially since we're still in this tight lending market.”
Mortgage Market Complications
Credit unions faced less revenue pressure when the mortgage market was active, Bruyere pointed out.
Brandy Bruyere
“But with interest rates being what they are and consumers parked on their lower-interest-rate mortgages, I think that's added to this challenge,” she explained.
Bruyere said some of the pressure from the mortgage side of the business may subside as consumers eventually begin to move due to changes in their lives—whether they have a 3% mortgage or not.
“Still, I think it's going to take creativity, looking at how can you maximize within the boundaries of applicable regulations and being able to adapt quickly to different market constraints and maximize opportunities,” she said.
Rethinking Loan Pricing
Will one of the options credit unions pursue in seeking to recover lost OD fee revenue be to boost their loan pricing, perhaps to move closer to the rates from competing banks? Bruyere believes CUs would be limited in such a pricing response, especially given their cooperative model and member orientation.
“I think credit unions have hung their hats on lower interest rates and higher dividends on deposit accounts,” she said. “I think that we'll have to eat into some of those benefits, and maybe be a little more aggressive with our (loan) risk pricing, as well. If we can't have as much non-interest income, and have limited investment levers we can pull, improving interest income seems like a natural next step. So, does that make us not a credit union anymore? I don’t know.
“That said, I do think we can keep other really important elements of our business model, as well, and serving people that banks tend to not want to serve,” Bruyere added.
Reaching Out to the Underserved
Bruyere said the evolution in the market could lead to credit unions expanding service to the types of consumers banks turn away.
“The underserved, right? Maybe we begin to develop more products for this market. Maybe we have what you might call fresh-start products—fresh start checking, fresh start savings, credit builder loans…Bringing in more of these types of members and having them build their financial lives with the help of the credit union.”
Beyond those basic strategies, credit unions will have no choice but to get more creative, Bruyere said. “We've seen some credit unions investing in more digital technologies through CUSO relationships. We've seen credit unions make investments in title companies….”
A Different Fee Issue
But Bruyere cautioned that as credit unions begin to deepen their relationships through existing and new types of CUSO interests, they must pay attention to the fees that may be exchanged or charged between the two organizations.
“We have to be careful this does not become the next frontier of a junk fee,” she said.
Finally, Bruyere noted one response to the new environment could be an old school credit union strength: greater collaboration.
“We're competitors, but we're also a pretty collegial industry, comparing notes…,” Bruyere said, adding this could lead to more credit unions collaborating through CUSOs.
Two Types of CUs
Overall, Bruyere said credit unions will simply have to diversify their revenue streams. She emphasized that many credit unions, including those that have been targeted by lawsuits over overdraft and NSF policies, serve as an example of how diversification can become a route to pruse.
“There are two types of credit unions: those that have already adapted to their new fee environment and those that are going to have to change,” she said.