All financial institutions, especially credit unions, provide valuable services. Verifying, or if you prefer, sharing draft accounts, has value, but they’re ubiquitous, so consumers no longer recognize their value.
Credit unions have done this to themselves by traditionally offering free checks. We don’t recognize the value of trading accounts, so how (or why) would our members do it? We need to find a way for members to see the value again. And credit unions need to find a new way to generate revenue from that value.
Income generation is hard… and getting harder and harder
Credit union revenue generation is under attack and has been for decades. Between lawmakers and regulators raising charges while capping fees, narrowing net interest margins and bringing new competitors into the market, credit union executives — especially chief financial officers — feel a little beleaguered. I understand.
Then, just as interest rates rise slightly to provide some breathing room, lawmakers are eyeing your credit card trading revenue. To top it off, the CFPB has made it its mission to eliminate overdraft fees.
As credit unions, you are limited to interest and fee income which, for most credit unions that offer the service, comes primarily from overdrafts. Both are under fire. We can’t control the rates — if you can, you’re mighty readers — but credit unions can do something about the fees we charge.
Overdraft fees make money
Some credit unions and banks have found ways to get ahead of regulators. Several have made headlines by announcing reduced or free overdrafts, under certain conditions. Even Bank of America reduced its overdraft price from $35 to $10. Friendly or a stroke of financial genius? Because, according to Moebs Services, which specializes in overdraft products, the reduction in individual fees will increase overdraft income.
Wait, come back. What was that?! It’s true. When BoA and Walmart, which together account for nearly a third of all overdraft revenue, cut prices in the second quarter of 2021, overdraft revenue increased by 3%. Correlation or causation? You decide.
In the company’s research on overdrafts, dating back nearly 40 years, attitudes toward overdrafts evolved from a penalty to an error as debit grew and checks disappeared (since the in-person use).
The research also revealed that transaction accounts are not profitable for most financial institutions. Yet, according to Moebs Services, the overdrafts were equivalent to $33.4 billion in business. It would seem that these revenues are not distributed evenly between the establishments.
Moebs offers pricing and structural change suggestions to avoid regulatory and other issues while making trading accounts profitable.
As nonprofits, credit unions historically treat revenue and profitability as taboos. But without profit, how do you serve your members? Profit allows you to invest in new products and services. This is how you create efficiencies or expand service areas. This is what allows you to keep regulators at bay.
Revenue and profitability are part of the mission to serve members, encourage savings, and provide a path to financial inclusion and stability for working Americans.
I’d like to ask a broader question for credit unions: is overdraft fee revenue aligned with your mission?
Overdraft fees: punitive or boo-boo (and does it matter?)
As Moebs said, attitudes toward overdrafts have changed among regulators, financial institutions, and consumers. While some groups see these fees as punitive, others see them as boos.
Perception is reality: for consumers, overdrafts have become so commonplace that they have lost their value proposition. Just as checking accounts have gone from fee-based to free and commoditized, so too are credit unions.
So are overdrafts still the fundamental purpose of your credit union, when…
- According Fortunethe most financially vulnerable households – struggling to put food on the table and keep the heating or air conditioning on – are 10 times more likely to pay overdraft fees than others.
- Black and Latino families spend a greater proportion of their income on financial services due to lack of access to credit at a fair price.
Nearly half of credit unions would disappear
Moebs’ research found that 43.1% of credit unions would fail without overdraft fee income. Revenue on the backs of the very people we were founded to integrate into mainstream financial services. Sure, that keeps them away from payday lenders, check cashing shops, car title lenders and loan sharks…but is “not as bad as them” really our raison d’être?
The dilemma becomes, how can we as credit unions replace non-interest income when:
- Promote savings;
- Bringing more financially vulnerable people into the mainstream of affordable financial services; and
- Earn enough to keep the lights on while investing in improved member services?
Here is an idea.
Verify with Verification
Let’s look at current accounts differently. Instead of just holding value, what if they created it? I’m not talking about slightly increased interest rates. I’m talking about a tangible value that makes a difference in a member’s life.
Replace punitive overdraft fees (that’s what they are, although not everyone sees them that way) by generating income from your checking accounts. Rewards are a good start. But you can go further. I’m thinking of cell phone damage protection, discounts on prescription drugs, savings on entertainment and meals, and more.
What does almost everyone have? A cell phone. Many of you are probably reading this on yours. What are their biggest challenges? Cracked screens and water damage. Imagine if your checking account could significantly reduce the cost of these repairs for your whole family? Say goodbye to $15 per month per device insurance!
What is a major social well-being challenge? The cost of medical care. Credit unions can’t solve the big problems, but you can be part of the solution. Discounted prescriptions when a member can’t afford health insurance or it’s not covered – who’s going to say no?
All for less than the cost of their Netflix subscription.
This is the mission
Relevance. Saving. Financial inclusion. Together, we can evolve the way the credit union‘s mission improves people’s lives starting with checking accounts and eliminating overdraft fees by creating value and earning new revenue.
Joe Winn is CEO of GreenProfit Solutions, a provider of loan and income growth programs for credit unions and community banks headquartered in Plantation, Florida.