On Feb. 3, the CFPB penned a letter to the 25 largest retail banks calling on financial institutions to make lower-risk accounts more accessible to consumers to help prevent overdrafts. Now, the bureau's actions have some credit unions worried a potential rule could be on the horizon – something that could considerably impact noninterest income generation.
According to a 2012 report from the Madison, Wis.-based think tank Filene Research Institute, noninterest income has long been a hot topic for many credit union CEOs. Credit union CEOs surveyed for the report stated they are seeking a balance between creating noninterest income to support their continued operations, and charging fees that are fair and support services that add value to members.
"The tension is real," Ben Rogers, research director at Filene and the report's author, said in the report, "In Search of Member-Friendly Noninterest Income." "The credit unions are trying to walk that line between having sufficient NII and offering real value to members," the report said.
Striking that balance is not easy for credit unions trying to get ahead of the CFPB's call to action, which could narrow the yield on an already-dwindling amount of noninterest income. Filene reported overall ROA less fees and other noninterest income for credit unions has gone from 34 basis points in 1990 to seven basis points in 2000, and all the way to negative 63 basis points in 2011.
Additionally, income from noninterest sources has risen steadily from 61 (1990) to 95 (2000) to 131 (2011) basis points.
"NII keeps credit unions afloat," Rogers wrote.
The report said that since the financial crisis of 2008, regulators have taken a keen interest in financial services fees of all kinds.
"Everything from payday loan fees, to mortgage originations, to boring interchange income are increasingly seen as nefarious from inception, guilty of being anti-consumer until proven innocent," the report read. "Justified or not, this thinking by the American public and policymakers led to the creation of the Consumer Financial Protection Bureau and to many of the revisions found in the Dodd-Frank Act."
Additionally, estimates in the report show a majority of noninterest income came from a combination of overdraft fees, and debit and credit interchange income. Thanks to new overdraft opt-in rules mandated by Regulation E, credit unions' fears that income would be devastated due to a mass consumer rejection of overdrafts did not come to fruition, the report added.
But now that the CFPB has taken steps toward potential guidance, credit unions are taking aim at hitting the ground running before any form of rulemaking is in place.
The $1.1 billion Altra Federal Credit Union in Onalaska, Wis. offers an account that does not charge overdraft fees for its members. Called the My+ account, it is Altra's answer to the regulator's desire to avoid overdraft fees. The account does not include paper checks and costs $4.95 per month; the fee is waived if the member makes 15 debit card transactions or more a month.
"It's definitely something we've been talking about for a while," Mary Isaacs, CFO for Altra, said.
Isaacs explained that one of the challenges of debit cards is if the member executes a signature transaction, he or she could overdraw.
"We still aren't going to charge a fee and there's a little bit of manual intervention on our parts to make sure there are still no fees," she said. "We thought [My+] would be more popular, but with the people having online banking and mobile, people know their balance better."
Currently, 100 of the credit union's 53,000 checking accounts are My+ accounts.
The credit union relies on the profitability of its other accounts, which are driven by interchange income and NSF fees. Interchange fees combined with monthly fees will make up the difference between the non-overdraft accounts and traditional accounts, according to Isaacs.
Of the approximately 100 My+ accounts, 70% of accountholders had a credit score lower than 600 and 45 had no score, "primarily due to age," Isaacs added. Additionally, half of the account holders were born in 1990 or later.
Similar offerings at other credit unions give members additional options for avoiding overdrafts or charge small fees for overdraft protection. Some allow for money transfers from a savings account for a small fee, while others provide a line of credit and allow the checking account to access the line of credit to prevent overdrafts.
Altura Credit Union in Riverside, Calif., which has $1.2 billion in assets, provides a host of services that allow for overdraft protection. A member can link to a savings account as a backup in case of an overdraft, or link to an Altura credit card.
It's this type of cross-selling that can keep noninterest income stable on the balance sheet and in its effect on the bottom line, according to Rogers.
"What are the options for moving forward? The big takeaway is that these have got to be value adding services," Rogers said. "Overdraft is certainly valuable for a segment of consumers, but it's really easy for regulators and other groups to sharp-shoot those fees because in their worst forms, they look pretty predatory."
Cross-selling additional products can help deepen member relationships for credit unions, he added.
"Is it going to be as much money in the moment as an overdraft would be? Probably not, but there are other advantages," he said. "They cross-sell credit card products, providing members with additional protections. It's not a one-for-one replacement for the overdraft, but it is an opportunity to deepen the relationships and shows them that you are taking care of them, and by taking care of them, you are giving them a separate product."
Isaacs added by developing member relationships, Altra can penetrate the checking account field further.
"The My+, it's a trainer account and we're hoping it leads to other things," she said, adding while the account type may not make a lot of money for the credit union, it "opens the doors to members."
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