By Ray Birch
LOMBARD, Ill.—While credit unions will make individual decisions on overdraft pricing, growing pressures to reduce or eliminate the fee is going to require many CUs move away from price as the primary point of competition, while also diversifying income streams, according to one person.
Raddon SVP of Research Bill Handel emphasized that point during a conversation with CUToday.info about overdrafts, saying the industry now faces a critical juncture.
“This is a moment of importance for the industry,” he said. “We've always used price as our true bellwether. We always have claimed this to be service. But price is actually the thing that we tend to differentiate ourselves on. I think we have to examine that more closely and say is that really the way we want it to be. For example, the number-one player in mortgages is Rocket Mortgage. If you look at Rocket's interest rates you can beat Rocket almost every day. You can find a better deal. Yet rocket is the dominant provider, especially in the purchase market. That tells you something.”
The Point Isn’t the Basis Points
Handel argued that credit unions are too focused on basis points.
“We sleep basis points and we think that's the way everybody else thinks,” he said. “But not everybody thinks that way. We have to really think about our value proposition, and it doesn't always have to be price.”
And overdraft price, emphasized Handel, is likely to be driven down for all institutions following the CFPB’s new overdraft rule. Handel, agreeing with several other analysts who have spoken with CUToday.info, said the CFPB rule that applies only to the largest institutions will nonetheless trickle down to all shops through competition.
Citing an Example
Bill Handel
What’s happening with the overdraft rule will not mirror how the Durbin rule on debit interchange affected credit unions, according to Handel, who noted the $10-billion threshold for that rule actually did protect many organizations under $10 billion.
“If you were under$10 billion then, you absolutely were not impacted,” he said. “Now, today, if you are under $10 billion in assets you are absolutely impacted by this (overdraft rule). It's going to be very difficult for you to be operating in the same market as an organization charging $3 when you are charging $25 or $30. This is going to be very difficult, because as soon as it comes out in the local press about what you are charging, there's going to be a lot of pressure put on you.”
‘Accept & Live With It’
As others have stated, Handel, too, believes the CFPB’s intent is for the new rule to affect all financial institutions.
“They said it only affects the organizations over $10 billion, but they know it’s going to affect everybody,” Handel said. “You are kind of left just to accept this and live with it, unless we have a change in administration as a result the election.”
A key point Handel stressed is that no financial institution should have an overly high level of dependency on one source of income.
“You need to be much more diversified in how you generate your earnings,” he said. “So, if you've built an organization that has a huge dependency on overdrafts, you've got to do start shifting away to a much more balanced approach as to how you generate earnings.”
Why have some credit unions become dependent on OD revenue, which has generated negative press, driven largely by consumer groups? As CUToday.info reported, Consumer Reports recently headlined an article: “When It Comes to Junk Fees in Banking, Credit Unions Can Be Among the Worst Offenders.”
That headline was based on a report by California’s regulator that detailed just how much of their total income OD fees represented at some state-chartered CUs.
The Few, The Whole
“It's a few that define the image of the whole, right? There's not that many organizations that are highly dependent on overdraft revenue; however, some are,” Handel said.
Handel said sometimes that overdependence is driven by a lower-income field of membership that makes it difficult to make loans.
“So, something like overdrafts becomes a very easy way to make yourself whole from a financial perspective,” he said. “It's a financially driven decision that allows this to become a bigger and bigger part of what they do.”
Handel pointed out that when people sit down with financial advisors, they’re typically told to diversify their investments.
“Rightfully so, they will tell you this. It’s critically important to diversify, and I think that's the thing these organizations that rely too much on overdraft revenue miss,” he said. “You can't have that degree of reliance upon any one thing if you're to be successful long term.”
Adjustments Needed
It won’t be an easy process for many CUs, Handel said.
“These organizations are going to be forced to take some pain,” he said. “Moving away from a heavy reliance on overdraft revenue will create some pain. Many of these organizations could continue to rely on overdrafts and their members really wouldn't care. Members will continue to pay the fee and there may be some negative PR, and the credit union will just accept that and be fine—because they've built such value there and loyalty within their membership. Others will be forced to react and respond to (the new movement away from overdraft charges) and will have to find ways to replace that income source.”