By Ray Birch
LOUISVILLE, Ky.—Credit unions will be able to reprice checking accounts and absorb the revenue hit that’s coming from the CFPB’s focus on overdrafts, but long-term it will take innovation to succeed with this core product, asserts one analyst.
Bob Giltner, CEO at R.C. Giltner Services Inc., sees the end coming for the majority of CU free checking programs as the CFPB zeroes in overdrafts. “If what we all expect to come to fruition from the CFPB, free checking will be substantially diminished as a mass-marketing strategy.”
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, a number of analysts have predicted to CUToday.info. In play is approximately $32 billion in overdraft revenue for the entire financial services industry, according to Moebs $ervices—$6 billion for CUs.
“The CFPB will take away overdrafts on debit cards, which aligns with what they have done with prepaid. And that will reduce overdraft fee revenue by 50%,” said Giltner, adding that he does not think the CFPB will be able to attack check and ACH overdrafts.
Planning Should Begin Now
It won’t be until 2016 before new rules on overdrafts take effect on debit, estimated Giltner, adding that planning must begin now.
“Credit unions will have to realign and re-price checking accounts, but this is not the end of the world,” said Giltner. “Canadian banks and credit unions offer a checking-fee model that relies little on overdraft fees, where the average checking account costs $15 a month, and 20% of the accounts cost $20 to $30 a month. The marketplace can adjust to regulatory changes.”
Giltner, recognizing that some CUs will still offer free checking for those who meet certain relationship requirements, added that credit unions may also look to make more income from overdrafts untouched by new CFPB rules.
“Possibly higher charges on checking overdrafts,” proposed Giltner.
But Giltner emphasized that while credit unions will be able to reprice around the regulatory checking hurdle that’s likely coming, repricing won’t protect them from Silicon Valley.
“By far the bigger risk for CUs are the booming digital transaction and liquidity providers such as Lending Club, PayPal and PayPal credit, Prosper…,” said Giltner, whose company markets the PaySound online digital checking product that does not offer overdrafts.
OD Revenue Already Dropping
Giltner said these companies are already chipping away at credit union overdrafts, pointing to CU overdraft revenue falling for the first time last year. The recent Moebs $ervices Overdraft Revenue Study that showed credit union overdraft income fell in 2014 by 3.9%.
“CUs are now seeing their customers use alternatives for payment and liquidity that sap the revenue from their accounts, where others offer liquidity options online or at the point of sale, and alternative payment options that settle to the CU as revenue-neutral debit ACH,” said Giltner. “We can’t reprice around our members not transacting with us.”
Giltner encouraged CUs to focus on digital payments and liquidity strategies to compete in the new environment.
“We can’t focus on regulations as if things are out of our control and curse the darkness,” said Giltner. “We need to recognize that innovation, rather than regulation, is always the bigger challenge.”