By Ray Birch
DALLAS—With the market, the media and the CFPB putting pressure on credit unions to eliminate or lower overdraft fees, credit unions will likely have to adjust their business model and raise lending rates, according to one balance sheet expert.
As CUToday.info has been regularly reporting, moves by some large financial services providers to reduce or eliminate their overdraft fees, as well as media reports around what credit unions charge in such fees, has put pressure on many CUs to find ways to make similar reductions. But that typically means finding replacement revenue somewhere else.
The scenario facing many credit unions is difficult, said Thomas Griswold, managing director of advisory services at ALM First, who acknowledged that lower loan rates—especially for auto—have been a trademark credit unions have embraced for years. But it’s a trademark in jeopardy.
“I think a lot of institutions will have to make some decisions, make changes,” said Griswold. “To say that credit unions would be OK with less profitability or less ROA, that shouldn't be the solution. And I don’t think that will be what shakes out. I think it will require at least some level of change to the business model. It will mean pricing loans more intentionally to make sure they're pricing and allocating capital appropriately. That will be a big change for the way a lot of credit unions do business.”
Griswold said just what credit unions will actually do, though, is uncertain.
“There are a number of different avenues,” he said. “It could be finding new ways to generate non-interest income. I don't think there's a magic solution. Maybe it's finding another type of fee that members will see value in. Maybe it's doing more to originate and sell in order to generate the income that is lost. It could be on the operating side—maybe the credit union has to look a little bit more at their efficiency ratios and do more cost control.”
Loan Rate Increases?
One of the big steps CUs will take, surmised Griswold, is increasing rates on the lending side across the board.
Thomas Griswold
“Increasing rates on the loan side, in my opinion, will be the most likely scenario that plays out. It's just less member giveback,” he said. “I’m not sure deposit rates will necessarily come down because right now, credit unions are also trying to grapple with liquidity. A lot of institutions will hesitate to lower deposit rates for fear of losing some of that liquidity.”
A Difficult Challenge
Griswold said the many CUs’ balance sheet position is a difficult one, and yet many credit unions have been forced by the market to make a decision on whether to markedly drop or eliminate overdraft fees or overdrafts altogether.
“A lot of institutions are already saying, even more than a year ago, we're just going to do away with overdrafts or we're doing something that's going to be different,” Griswold said. “It's definitely something credit unions need to pay attention to. As I said, once you get a certain number of institutions saying we're just doing away with overdrafts and they start marketing those moves, things will snowball for the rest of the market as others quickly follow. That kind of market competition and market forces will just push everyone in one direction.”
The First Cut?
Griswold believes some of the early decisions will be to cut out the year-end giveback at those CUs that offer bonus dividends and/or loan rebates.
“I do think there will be a bigger focus on how to improve productivity, or just gain efficiencies,” said Griswold, who believes the pressure could lead even more credit unions to seek greater scale through mergers or acquisitions.
“Everyone's trying to gain scale and improve efficiencies, so I think some of this is just a natural evolution and maturation of the growth cycle,” he said.
Getting Creative
Griswold said ALM First is aware of credit unions that have developed some creative ways to get more fee income.
“We’ve seen some offer some type of subscription package where members pay a monthly fee to never have overdrafts, things like that. We're definitely seeing a lot of institutions trying to think of new ways to show value to members,” he said. “Also, all institutions have to continue to price and risk appropriately. Focus on what they do best. They will see some impacts to the bottom line, but credit unions are great at providing loans to people who need it. I don't think that changes. Maybe they need to adjust their pricing a little bit to overcome some of this lost overdraft income…
“But don't get distracted,” he cautioned. “Just focus on pricing that risk appropriately and making good loans to the individuals that need loans.”