Credit Unions Shift Checking Account Strategy 

The number of checking accounts has fallen by almost 100 million in the last six years, according to recent research from financial institutions analytics company Moebs Services, but credit union industry experts said not every credit union is feeling the pinch – in fact, many can benefit from the change in the checking landscape if they know why it’s happening and how to capitalize on it.

Using bank, thrift and credit union data from the NCUA, FDIC and Federal Reserve, Moebs Services reported in May that the total number of checking accounts dropped from about 690 million in 2011 to just over 600 million in 2017 – a 12% decline over six years, or about 2.2% per year. Those numbers also include business accounts, Moebs Services Economist and CEO Michael Moebs told CU Times.

Much of the drop is due to competition from fintech companies and retailers such as Walmart, Starbucks and Apple offering products that mimic the features of checking accounts, Moebs said.

“Most depositories don’t realize Walmart, and soon Amazon, are taking away their key service,” he noted in his original report.

Many fintech firms and retailers, he said, are often eager to attract customers with small balances – they save the companies money by reducing their interchange or swipe fees. “Walmart pays millions in interchange each year,” he explained. “So, if a Walmart customer swipes a debit card or prepaid card from Walmart, Walmart does not have to pay swipe fees.”

For credit unions and other financial institutions, however, many checking accounts are unprofitable if members conduct plain-vanilla transactions and don’t maintain high balances, Moebs noted.

That has prompted many financial institutions to dial back checking’s relative strategic importance. Much of that swing started back in 2010, when Bank of America announced it would stop providing overdraft protection on debit card transactions, Moebs said. The move heralded an industry-wide move away from free checking and transaction-based business, and toward relationship pricing, he noted.

It also created an interesting dynamic for credit unions, many of whom welcomed scored bank customers looking for cheaper, friendlier checking accounts.

“Credit unions have since gone strongly after free checking. And the credit unions have actually increased the number of checking accounts since the peak in 2011,” Moebs said. “While the banks are losing and the thrifts are losing, the credit unions are gaining and the fintech firms are gaining.”

Even though the average number of retail checking accounts per credit union branch has fallen by about 25% in recent years, dropping from 4,908 to 2014 to 3,915 in 2016, according to data from Cornerstone Advisors, partner Terence Roche said the growth in credit union checking accounts has actually been quite stable and that the drop is likely at least partially attributable to increases in the number of branches during that time.

“New branches will always have fewer checking accounts. New account activity was very consistent,” he said. “Where I think you will see shrinkage probably is in credit unions and banks that are really consolidating older accounts – either overdraft programs or free checking, where it’s really a consolidation of various accounts that used to be there that they just decided they don’t want to offer anymore.”

Tom Long, founder and principal at The Long Group, which does strategic planning for credit unions, said every financial institution that his company represents is seeing strong double-digit sales growth in checking.

“The proportion of profitable checking accounts has increased five-fold over the last 25 years,” he added. “This strategic shift in profitability has migrated the consumer checking account from loss leader to a profit center.”

Much of the boost is coming from account switchers, movers and people forming new households, as well as more opportunities to generate fee income, more consumer acceptance of less costly self-service technology and low interest rates that encourage expanding average checking account balances, he said.

“There’s lots of business to be won,” he said.

But making those accounts profitable often means working to earn more than just transaction fees, according to Long.

People typically regard the financial institutions that hold their checking accounts as their primary financial institutions – and that designation can be very lucrative, he explained.

“The institution that owns that PFI designation also owns the annuity advantage of consideration, which means that I’m going to be thought of in the next financial purchase,” he explained. “And so that means that if I own that checking account at a credit union, I’ve got momentum in capturing that next product sale. And then that of course provides me with an opportunity to enhance that relationship profitability.”

The key to a profitable checking account is to combine it with at least one other money-making service or product, effectively swapping out business from single-service households with low-balance, high-transaction, free checking accounts for relationship checking accounts in which members use two or more services, according to Moebs.

“Otherwise, depositories are glad to let go of unprofitable, high transaction, low balance, often free, checking to fintech firms,” he said.

Adding that second or third product is often easier said than done, though. One-third of checking account households maintain a single-account relationship with the institution, and that includes funded but unused credit union share accounts, Long noted. “As a result, the checking account has not translated into the relationship-building opportunities anticipated,” he said.

Plus, credit unions could soon face more pressure from megabanks that are showing more interest in checking lately, Roche said. That’s probably going to affect credit unions, especially given that those megabanks have enormous marketing and IT budgets, he noted.

There are four things credit unions can do if they want to earn more from checking accounts and brace for more competition, Moebs said.

1. Get real about who the competition is. “The credit union’s competition is no longer other credit unions, which is what well over half the credit union managements think it is,” Moebs said. “The first thing credit unions have to be thinking is their major competition is Walmart and Apple, because their costs are lower, and they don’t want balances and they can make money.”
2. Charge $20 or less for overdraft. “Here the credit unions are making a huge mistake. They are now matched with the banks and the thrifts at a $30 median price. They can’t do that,” Moebs warned. Credit unions should charge less than $20 to remain competitive with the Walmarts of the world, he added. “We have worked with credit unions under $10 billion to lower their prices, and guess what? They make more revenue and they have happier members.”
3. If free checking is a must-have, then emphasize interchange fee growth. The Durbin Amendment to Dodd-Frank caps debit interchange fees for institutions above $10 billion in assets. “The vast majority of credit unions, all of those under $10 billion, can make 43 cents on each one of their transactions, and that places them at a competitive advantage in relationship to other banks and even the big credit unions,” Moebs noted.
4. Cut operating costs. Snatching a checking account away from a megabank that has abandoned free checking may sound like a good thing, but if the costs of maintaining that checking account are high, credit unions could be shooting themselves in the foot, Moebs warned. The key is to keep the annual cost of a checking account under $200, he said. “Even with free checking, you can make checking profitable.”