LAKE FOREST, Ill.–Many credit unions will look back on 2018 as the year former bank customers were in, and free checking was on its way out as a result, according to one analyst.
J.V. Proesel, director of research and client services with Moebs $ervices, told CUToday.info credit unions are adjusting their checking offerings after finding out many of the bank converts who fled to CUs post-recession to avoid bank fees are unprofitable.
2018 is also the year many CUs have responded in the wrong way when it comes to adjusting the pricing on their checking offerings, the same analysis suggests.
A new checking study from Moebs $ervices reveals from the peak of free checking for credit unions nine years ago until 2018, 41% of credit unions have gotten out of free checking, and 72% of the decline came in 2018.
“And we believe, mostly in the second half of 2018,” said Proesel.
A Cue from BofA
The Moebs 2018 Free Checking Survey shows 61.4% of all depositories now lack free checking.
“This is three times more than 10 years ago,” said Proesel. “Banks, thrifts and credit unions are changing their checking brands. Their purpose is to target relationships to make checking profitable. A checking account associated with a loan, deposit account, wealth management, etc., makes the consumer household relationship profitable, even though checking lacks profitability.”
What happened, largely in 2018, said Proesel, is many more CUs have adopted bank consumer checking pricing.
“Many credit unions dropping free checking have taken their cue from Bank of America,” said Proesel, referring to the banking giant’s relationship-based checking pricing.
But Proesel warned that a lot of the credit unions exiting free checking are not using relationship pricing to drive revenue, which he said is a mistake.
“Many of these credit unions are adopting a minimum balance and fee for not maintaining the minimum. They are doing this, they believe, to get extra fee revenue,” said Proesel. “The problem with this approach is it isn’t working—CUs are not getting sufficient fee revenue while losing consumer checking accounts and especially the lucrative overdraft revenue which comes with free checking.”
Lack of Sales Skills
J.V. Proesel
Proesel said even those credit unions turning to relationship pricing are at risk when they are not skilled sellers.
“A problem with many credit unions is they do not know how to sell,” contended Proesel. “Credit unions, and this doesn’t count the mandatory share account, get 1.1 accounts per member, while banks get 2.9 accounts per customer. Free checking made checking a commodity for CUs. This means the member who comes to a CU wants only one thing. It will take years before the majority of credit unions have the ability to do relationship pricing well.”
Proesel said the Moebs $ervices’ analysis is based on 2,947 depositories that were contacted in December 2018.
“We knew free checking was changing, so new, innovative survey techniques were used to ensure a degree of precision on primary data collection never before achieved,” he said. “This data is the best there is with a 71% audit rate in comparison to the 3% industry standard. Every bank, thrift and credit union of more than $500 million in assets was included in the survey, and a statistical sample for the remaining population with assets less than $500 million.”
Free Checking Declines
With the study revealing 38.6% of depositories offer free checking, Proesel noted the percentage is down 27.1% from 2017.
“Free checking has been around since checking became consumer oriented after World War I,” Proesel said. “Banks escalated free checking in the 1960s and credit unions started in the 1970s. For credit unions, until 2018, free checking was the primary transaction account service offered.”
The peak of free checking was in 2009 when 81.5% of all depositories offered free checking, he said.
The Moebs 2018 Free Checking Survey found less than one-third of banks offer free checking, and less than half for all thrifts and credit unions. Only 12.3% of all depositories greater than $25 billion in assets offer free checking.
The 138-million consumers who still have free checking are mainly found in the eastern U.S., especially in Massachusetts and Pennsylvania, said Proesel. “Depositories in cities still offering a home for free checking are Pittsburgh, Boston, Baltimore and Washington.
No More Burger, Fries & Drink
Depositories in large cities and also in the southern region have curtailed free checking, said Proesel. States moving away from free checking offering less than the norm of 38.6% are Nevada, Delaware, Georgia, California and Florida. Many depositories in cities abandoning free checking are located in Las Vegas, Sacramento, Calif.; Tampa, Fla.; San Francisco, Miami, and Houston.
“It used to be a burger, fries and a drink, but now it is just burger and a drink,” said Proesel. “Free checking is the fries of the relationship. If you eliminate fries at McDonald’s, you risk elminating customers. If not done correctly, eliminating free checking at financial institutions—especially at credit unions—curtails relationships and reduces fee revenue. So, I walked out of McDonald’s when they said they don’t sell fries anymore and went to Walmart who was hollering, ‘We have fries.’”