By Ray Birch
LOMBARD, Ill.—Some credit unions are “scared” of what lies ahead for free checking.
They have reason to be concerned, according to Bill Handel, SVP-research with Raddon Financial Group, who said it’s time for CUs to move to “explicit” or “implicit” relationship pricing on checking, and in the process also be honest about their abilities to do so.
Handel agrees with many experts who predict the CFPB will soon extend prepaid overdraft rules to checking, which is expected to dramatically reduce FI overdraft revenue. One economist is predicting the average overdraft charge will drop from $30 to $1, and further predicted the result will be the elimination of free checking at credit unions.
Handel also sees CU debit interchange income falling markedly due to some big box merchants moving to lower-cost PIN-less debit routing.
Relationship Pricing
Together, these forces will push many credit unions to abandon free checking as it is known today within the movement and rely on a relationship-pricing model, said Handel.
“Credit unions need to begin revising their checking account strategies, thinking about how they will compete when they can no longer rely heavily on non-interest income as a driver of profitability,” advised Handel. “It scares credit unions to think about having to move away from free checking, as they feel it is essential.”
Pointing to all the membership growth CUs have received post-recession, Handel noted that much of that growth is due to free checking. “Again, the notion of moving away from free checking frightens credit unions.”
Handel, like others, predicts overdraft revenue will get cut in half, largely from CFPB rules forcing FIs to dump overdraft on debit.
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.
Grow Account Base
Handel suggested that credit unions’ success in growing their cumulative account base and the resulting income debit interchange income from the related increase in volume has helped mask a 25% drop in overdraft revenue, on a per-account basis over the last four years.
But debit interchange won’t continue to pick up the slack, as Handel predicts that, too, will fall sharply.
Handel pointed out that merchants such as Costco, Walmart and others recently decided to route all transactions below $50, including signature debit, through PIN-less debit. Under that routing merchants process the transaction as PIN, but don’t require the customer to enter their personal identification number.
Handel said the Supreme Court’s decision last year to uphold the Federal Reserve’s debit interchange guidelines—ruling against the merchants—has retailers taking action into their own hands.
“The net impact here is merchants are reducing their interchange costs, which is taking money out of the pockets of the issuers below $10-billion in assets,” said Handel, who added the move saves merchants about nine cents per transaction compared with higher-priced signature debit outlined for those under the Durbin carve-out. “Merchants are taking a little more (fraud) risk here by pushing these transactions though as PIN-less debit, but they are saving money at the expense of issuers.”
And add in competition from transaction-stealing online accounts that don’t offer overdrafts, like Walmart’s GoBank, and changes simply have to be made, insisted Handel.
“All of this is driving down the profitability of the checking account. I think we are looking at a pretty dramatic shift here.”
In evaluating the CU’s checking account structure, Handel insisted that one of the first decisions credit unions must make is whether checking will be self-sufficient or a loss-leader.
“Probably the vast majority of credit unions, initially, will look at checking as a loss-leader and support free checking,” said Handel. “But the challenge is to have credit unions actually follow through. Because now, with checking revenue falling, credit unions truly have to be successful in using checking as a product that generates more relationships. They can no longer just give lip service to this concept.”
Explicit Pricing
Those CUs that choose to use “explicit” relationship pricing, where balances, transactions, or account minimums are required to get free checking, should give members flexibility in choosing the way they want to “pay” for free checking, advised Handel.
“A combination of options might be best. Allow members to decide what works for their own financial situation.”
Those CUs that choose instead to go with “implicit” relationship pricing, where the cost of truly free checking is covered via strong cross-selling, must be realistic about their abilities to boost the average number of accounts per member, advised Handel.
“That means putting more muscle behind the traditional onboarding and matrix marketing programs,” said Handel, who questioned CUs’ skill here. “Based on credit unions’ ability to successfully onboard new members, this approach is riskier than biting the bullet and going with true, explicit relationship pricing.”
Handel added that strong metrics are critical if the credit union chooses implicit pricing, such as setting goals for lowering the percentage of checking accounts that are single service, and tracking progress closely.
“Long term I think credit unions will move away from free checking,” concluded Handel.