All financial institutions, particularly credit unions, provide valuable services. Checking, or if you will, share draft accounts, have a value, yet they’re ubiquitous, so consumers no longer recognize their worth.
Credit unions have done this to themselves by traditionally offering free checking. We don’t recognize the value in transaction accounts, so how (or why) would our members? We must find a way for members to see the value once again. And credit unions must find a new way to create revenues from that value.
Income Generation Is Hard … and Getting Harder
Credit union income generation is under attack and has been for decades. Between legislators and regulators increasing burdens while capping fees, narrowing net interest margins and new competitors entering the market, credit union leaders – particularly CFOs – are feeling a bit besieged. I get it.
Then, just as interest rates edge upward to provide a bit of a reprieve, lawmakers are eyeing your credit card interchange income. To top it off, the CFPB set upon a mission to kill overdraft fees.
As credit unions, you’re limited to interest income and fees, which for most credit unions that offer the service primarily come from overdrafts. Both are under fire. We can’t control rates – if you can, you are some powerful readers – but credit unions can do something about the fees we charge.
Overdraft Fees Do Make Money
Some credit unions and banks found ways to get ahead of the regulators. Several made headlines when they announced reduced or no-fee overdrafts, under certain terms. Even Bank of America reduced its overdraft pricing from $35 to $10. Consumer friendly or stroke of financial genius? Because, according to Moebs Services, which specializes in overdraft products, reducing the individual fees will increase overdraft revenues.
Wait, go back. What was that?! It’s true. When BoA and Walmart, together accounting for nearly one-third of all overdraft income, reduced their prices in Q2 of 2021, overdraft revenue increased 3%. Correlation or causation? You decide.
In the company’s research on overdrafts, going back nearly 40 years, attitudes toward overdrafts have evolved from a penalty to an error as debit evolved and checks faded away (from in-person use).
The research also found that transaction accounts are not profitable for most financial institutions. Yet, according to Moebs Services, overdrafts equaled $33.4 billion in business. It would seem those revenues aren’t spread evenly among institutions.
Moebs offers suggestions in pricing and structural changes to avoid regulatory and other concerns while making transaction accounts profitable.
Mission-Driven Revenue
As not-for-profits, credit unions historically treat revenue and profitability as taboo. But without profit, how do you serve your members? Profit lets you invest in new products and services. It’s how you create efficiencies or expand service areas. It’s what empowers you to keep regulators at bay.
Income and profitability are part of the mission to serve members, to encourage thrift and offer a path to financial inclusion and stability for hardworking Americans.
I’d like to pose a broader question to credit unions: Is overdraft fee income aligned with your mission?
Overdraft Fees: Punitive or Boo-Boo (and Does It Matter?)
As Moebs said, attitudes toward overdrafts shifted among regulators, financial institutions and consumers. While some groups see these fees as punitive, others see them as boo-boos.
Perception is reality: For consumers, overdrafts became so ordinary they lost their value proposition. Just as checking accounts evolved from fee to free and became commoditized, credit unions, too, must evolve.
So, do overdrafts still fit your credit union’s foundational purpose, when …
- According to Fortune, the most financially vulnerable households – struggling to put food on the table and keep the heat or A/C on – are 10 times more likely to pay an overdraft fee compared to others.
- Black and Latino families are spending a greater proportion of their income on financial services because of the lack of access to fairly priced credit.
Nearly Half of Credit Unions Would Go Dark
Moebs’ research revealed 43.1% of credit unions would go out of business without overdraft fee income. Income on the backs of the very people we were founded to bring into mainstream financial services. Sure, it’s keeping them away from payday lenders, check cashing stores, car title lenders and loan sharks … but is “not as bad as them” really our rationale?
The quandary becomes, how do we as credit unions replace non-interest income while:
- Promoting thrift;
- Bringing more financially vulnerable people into the mainstream of affordable financial services; and
- Earning enough to keep the lights on while investing in improved member services?
Here’s an idea.
Check Back With Checking
Let’s look at checking accounts differently. Instead of just holding value, what if they created it? I don’t mean slightly increased interest rates. I’m talking tangible, make-a-difference-in-a-member’s-life value.
Replace punitive (that’s what they are, even if not everyone sees them that way) overdraft fees by generating income from your checking accounts. Rewards are a good start. But you can go further. I’m thinking cell phone damage protection, prescription drug discounts, entertainment and dining savings, and more.
What does nearly everybody 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 substantially reduce the cost of those repairs for your entire family? Say goodbye to $15 per month, per device insurance!
What is a major social wellness challenge? The cost of medical care. Credit unions can’t solve the big issues, but you can be a 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.
It’s About the Mission
Relevance. Thrift. Financial inclusion. Together, we can evolve how the credit union mission improves people’s lives starting with checking accounts and eliminating overdraft fees by creating value and earning new income.
Joe Winn
Joe Winn is CEO of GreenProfit Solutions, a provider of loan and income growth programs for credit unions and community banks headquartered in Plantation, Fla.
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