By Ray Birch
BIRMINGHAM, Ala.—Free checking is not going away at credit unions—unless the CFPB is successful in coming down hard on overdrafts and CU debit interchange revenue falls sharply, says Dennis Dollar, who predicts that neither will happen.
The former NCUA chairman believes credit unions have an ace up their sleeves when it comes to expanding checking revenue—on average, less than 50% of the membership has a CU checking account.
“The demise of the checking account as an area of credit union focus is, in my view, greatly over-exaggerated,” said Dollar, principal at Dollar Associates. “The focus of credit unions on checking accounts will continue for the foreseeable future, despite the predictions of doom by some. There’s just too much good business for credit unions in checking accounts and transaction accounts, such as checking, really solidify the institutional relationship as a primary financial institution with the member.”
Some analysts have told CUToday.info that CUs need to jettison their free checking model and streamline checking accounts in preparation for the CFPB’s restrictions on overdrafts.
No Brakes On Free Checking Marketing
Dollar, however does not see credit unions taking their eyes off building checking account business for the foreseeable future. “No credit union is going to stop marketing as good of a revenue builder as are checking accounts simply because of what some regulator like the CFPB might possibly do in some future regulation that has not yet been proposed, let alone finalized.”
Many experts think the CFPB will soon target all overdrafts. The CFPB’s proposed rules on prepaid cards, which would re-categorize overdrafts as a loan, will eventually extend to checking and force FIs to eliminate overdrafts, sources have predicted, putting the free checking model in jeopardy. In play is approximately $32 billion in overdraft revenue for the entire financial services industry, $6 billion for CUs, according to Michael Moebs, economist and CEO at Moebs Services in Lake Forest, Ill. Moebs added that 93% of credit unions’ service charge income comes from overdrafts.
Dennis Dollar
Overdraft income is an incredibly important non-interest income generator to CUs, but so is debit interchange revenue, reminded Dollar.
“Both are driven by the checking account. Even electronic wallet options largely require some debit tie to a checking account or else a credit card paid from a checking account,” said Dollar. “Checking accounts are alive and well as a credit union marketing priority.”
CFPB Overreach?
The importance of checking to CUs is illustrated by the fact there is so much room to grown this business with existing members, and to create more PFI relationships, explained Dollar.
“Credit unions are going to continue to market the building of checking accounts as the average credit union has less than 50% of its members using its checking account,” Dollar noted. “Increasing checking account penetration will be a major tactical goal of almost every credit union, and I don’t see that changing because of fear of what the CFPB is or is not going to do on overdraft fees over the next several years.”
And Dollar said the CFPB’s actions toward overdrafts, if they become “overreaching,” will likely face legal challenges and a great deal of consumer opposition.
“The CFPB has certainly showed their hand in their prepaid cards proposal that they want to categorize overdraft fees as loans, thus triggering Reg Z and Reg E issues that will be problematic for every financial institution offering overdraft privilege programs,” said Dollar. “It will not just impact credit unions. The CFPB will have to deal with the aftermath of a draconian approach to overdraft fees on the loss of fee income that gets passed on to consumers in other checking account fees, and the fact that taking away overdraft privilege from consumers will drive more and more of them to payday lenders and check cashers.”
Wrong Perspective
Dollar asserted that the CFPB has looked at the overdraft privilege issue from the perspective of paid consumer advocates and academicians. “But I don’t think the CFPB has checked with the consumers on the overdraft privilege issue. After all, if consumers did not like the convenience and benefit that they receive from a financial institution honoring their check or debit transaction for a week or so until their next payroll comes in, this program would not be a success. Financial institutions make income off of overdraft privilege programs because their customers and members like having that privilege.”
Without it, the financial services industry would return to the “bad old days” of NSF fees and prosecuting bad check writers, added Dollar. “With all due respect to the CFPB, I don’t think consumers want to go backwards twenty years to the pre-overdraft privilege days.”
The trend for credit unions is to remain with free checking, as long as overdraft privilege and debit interchange revenue remain sufficient to cover the considerable transactional risk in checking accounts, concluded Dollar.
“If the CFPB effectively kills overdraft privilege or the courts strike down the bifurcated debit interchange rates, you will see credit unions reluctantly joining banks and other financial institutions in moving away from free checking,” said Dollar. “But I don’t think that will happen. I continue to believe that the bifurcated debit interchange rates will survive the current court challenge by the retailers and that even the hard-charging CFPB is going to have to accede to the realities of the marketplace demand by consumers for the overdraft privilege they have opted into.”