Continued Attacks on Revenue Sources Pose Challenges for Credit Unions in 2011
February 1, 2011
March 22, 2011
from John M. Floyd & Associates
As the Federal Reserve moves closer to implementation of the new interchange law that is scheduled for enactment on April 21, financial institutions across the country are concerned about how they will be affected by the possible loss of interchange fee income. While the proposal on interchange restrictions is not targeted to credit unions with assets under $10 billion, many speculate that the cap will be imposed system-wide with merchants steering consumers to cards with lower fees; resulting in a significant loss of income for smaller institutions after it is implemented on July 21 of this year.
When you combine this with the anticipated impact of costs to implement new consumer financial regulations, it isn’t surprising to hear institutions of all sizes considering charging fees for checking accounts. According to CUNA’s 2010-2011 Fee Survey of 1,200 credit unions, 91 percent of surveyed credit unions that offer check cards anticipate they will change their rates, fees and/or services as a result of the negative impact of the debit interchange regulation. The details vary from establishing or increasing debit card fees to increasing NSF/overdraft protection fees, to eliminating free checking all together and/or lowering deposit rates.
Before you get too far into the process of re-pricing or repackaging your share accounts, it is imperative to factor in how these changes will be viewed by your members. Quite frankly, consumers don’t seem to be too impressed by the impassioned pleas of financial institutions following the economic crisis that is still affecting communities, families and individuals from coast to coast. Results of different national studies indicate that the general public has grown accustomed to free checking services and many account holders are ready, should their credit union impose or raise fees, to move to another financial institution that allows them to continue to write checks for free.
In its recent study gauging consumer attitudes toward the importance of free checking, Acton Market Intelligence (AMI) found that 85 percent of respondents described free checking as a primary choice for the selection of a financial institution. When asked what they would do if their bank or credit union started to charge fees for services associated with what was previously their free checking account, 67 percent said they would likely switch to an institution that did not charge for checking.
Consumers Adjust Habits
As the interchange fee discussions continued through the first quarter of 2011, a study by The Nilson Report revealed that consumer use of debit cards in the first nine months of 2010 increased 14.6 percent over the same period of 2009. According to a recent article in Credit Union Journal, CUNA estimates that credit unions earned $2.6 billion in 2010 from interchange fees.
Alternative Revenue Determines Viability
By taking a look at how you can best provide your members with the services they need to maintain financial stability in today’s increasingly challenging environment, consider the benefits of implementing an overdraft privilege program.
A guaranteed 100 percent compliant overdraft program can increase your non-interest income from 50 to 300 percent. At the same time it will provide a value-added service to informed members should they ever make a mistake on their account or experience a financial emergency. Plus, an effective overdraft solution that is designed to supplement your product offerings can improve your processes and provide the tools your staff needs to streamline program implementation and management, including:
- a simple, straightforward system to monitor overdraft accounts;
- employee training on how to present the program to members;
- assistance with all compliance issues, policies and procedures;
- a structured process for communicating with program users that ensures transparency and keeps charge-offs to a minimum and;
- 100 percent core processor compatibility.
While Congress continues to hear arguments to delay enactment of interchange fee restrictions, forward-thinking credit unions are cognizant of the need to protect their long-term stability by offering services that allow them to maintain a strong bottom line, while preserving the loyalty of their members. The key to success is having a business partner that supports those efforts and guarantees them to be successful.