Amplify CU Shares the Philosophy and Business Behind Cutting All Fees

On Feb. 2, 2022, Amplify Credit Union ($1.4 billion, Austin, Texas) became the first U.S. financial institution to eliminate all banking fees. We talked with Chief Experience Officer Stacy Armijo about how the credit union pulled off the bold move, plus got her take on the recent chatter in the media around credit unions and fees.

CU Times: Why should credit unions care about the CFPB’s recent action against companies that will return $140 million in fees to consumers? And, what are your thoughts on the current discourse in the media around credit unions and fees, some of which has painted credit unions as predatory?

Armijo: The obvious component [of the CFPB action] is, let’s not make ourselves subject to these sorts of fines and this sort of exposure. But the bigger picture is, why are [credit unions] spending our time and energy on this when we could be spending it on things that will really drive our growth?

We have to choose our battles, and we can only choose so many conversations. And I find it, frankly, disheartening that credit unions are choosing a conversation to defend fees that are not a service to the consumer. I don’t think anybody would allege that they want to pay an overdraft fee, and I understand the philosophy behind that. But we’re choosing that conversation when we could be instead putting more weight behind the conversation around interchange income, for example.

One of the ways [Amplify was] able to go fee-free is because we believe it will drive growth, and with that growth will come increased interchange income, which is value-driven income. A merchant is getting value from being able to transact with our products, and it’s income that’s not coming off the backs of our consumers. So as credit unions, why are we choosing to defend fees that our members don’t want?

CU Times: How feasible is it for credit unions to eliminate all fees?

Armijo: I believe it matters how any organization makes money, especially credit unions, which are mission-driven organizations for community benefit, and I don’t believe we should choose to make money [through fees]. And I understand we’re dealing with legacy business models, so [not everyone can] just turn off this level of income and expect to have a financially viable organization. We did just turn it off, and we could do that because it was already not a significant portion of our income. For institutions of our size, it’s typically 25% of their income picture, and for us it was 4%. So it was an easier decision for us to make than it would be for institutions that are reliant on this, but those that are reliant on it are doubling down on it. They’re trying to grow this income stream instead of value-driven income streams. So I’m not saying everybody needs to do this immediately, but if the conversation in your boardroom is, ‘How can we convince regulators this is OK, and how can we make sure we can have as much or more of this income in the future?’, that is the wrong conversation. It should be, ‘How can we taper this income down in a financially feasible way, and what are the other sources of interest and especially non-interest income that are going to help us make that up?’

CU Times: What was Amplify’s approach to making up for the income it would lose in fees?

Armijo: 2-2-22 was the day we officially went fee-free, but it was more than a two-year process to get there. We did decide to do it in one fell swoop because we could, but it was interesting because, one you’ve got to replace that income, right? So how could we accomplish that? It’s really in two ways. One is we’re betting this is going to help us grow deposits. So with the ability to grow to deposits and loan that money out, you’re going to get the interest income on that. But then the other piece was interchange income. So if we can get more checking and savings accounts, and more active debit cards, we’ve got more deposits and more interchange. And in our world, it was considered a weakness in our business model if we did not have as much of this type of non-interest income as our peers did, and we decided to turn it into a competitive advantage.

So that’s how we navigated that as an organization, and the income we were looking toward from a non-interest income point of view was around mortgage origination and loan sales. So specifically, before the market froze, we were able to originate more than our entire balance sheet every year in mortgage loans. We have a very active loan sales and servicing arm. And so we were able to turn the heat up on that – again, a value-driven source of non-interest income. Those loan investors want these high-performing loans, and they’re willing to pay for them. That more than replaces the income that we are losing on these types of account fees.

I think what’s different about that is, [other] organizations are still thinking in silos. [They’re asking,] with checking and savings accounts, how can I replace this income? Whereas, maybe that’s not what a checking and savings account should do for you. Maybe a checking and savings account should just be your source of deposits. And you fund it and source it in the ways you always have, and then you make up that income in other areas of your business. Look across the balance sheet across different areas, and figure out how those can work together.

CU Times: Can you walk me through how Amplify went about its fee elimination process?

Armijo: I came on board with Amplify in mid-2018 in the role I have today as the chief experience officer, and as we were talking about the plans and things we wanted to do, I encountered a lot of conventional wisdom about deposits. For example, ‘You do this and then this always happens.’ And I would ask, ‘OK, so is that what’s going on in our business?’ and the answer was, ‘Well, maybe …’ And so what I determined was, the industry says a lot of things as if they’re truisms, when we really haven’t validated whether they’re true or not, especially in the current environment. So we decided to initiate some research on why someone will establish a new checking and savings account with a new institution. We had lots of opinions and theories, but we didn’t have any facts.

We had a research firm take a segment of our membership and a segment of the industry at large, focusing on the Austin area. We learned two things about the motivating drivers – one is security, and we already had that, and two is either rewards or fees. We decided we did not want to try to play the rewards game. The minute somebody has a quarter-point better reward than you do, that money is going to go to a new place, and so we felt like that wasn’t sustainable. So the researcher was presenting this to us and our CEO, Kendall Garrison, was in the room along with a bunch of us, and they were going through how people don’t like fees. Specifically, it’s not that they can’t afford a fee, it’s that it’s unfair to charge it. It was just as much an emotional reaction to a bank fee as it was $25. So in the meeting, Kendall said, ‘Why don’t we just get rid of them?’ Everybody laughed and thought he was making a joke. From there, we thought about it and looked at it more and more, and I couldn’t get the idea out of my head. That was December 2018 when we had that meeting, so we spent 2019 doing research to see how big a role fees play in our business model and who pays them. And in that process, what we learned is who pays these fees. Spoiler alert: It’s not the people with money. It’s the people who don’t have money who are paying these fees, which go to pay interest to the people who do have money. Ultimately speaking, that is how this system works – if you don’t have money, that’s when we’re going to take your money. And that finding was what kept us on this path. There was a ton of risk, this had never been done before, and we were giving up a significant amount of income on a bet. But that was really the piece of it that made us say, OK, this is no longer a marketing endeavor, this is a mission endeavor.

We decided it would be in our project plans for 2020. And then of course, the world changed, but we were able to keep going. It didn’t really interrupt what we had planned. And that’s when all the industry conversations started about [fees]. There were so many times we were tempted to launch it faster than we wanted to. I think it was around that time when Capital One started waiving overdraft fees. So we were thinking, is this not going to feel newsworthy or interesting if we wait? But we decided we wanted to do it right instead of fast. For us, doing it right meant understanding all the system implications, which was the hardest thing because our systems in banking are designed to elicit fee income. We actually had to do workarounds in a number of our systems because they couldn’t do zero-fee [transactions]. It was harder than you would imagine.

CU Times: Were you at all concerned about not being the first financial institution to do this?

Armijo: We worried that we wouldn’t be the first to do this, but what we really worried about was the fact that consumers don’t distinguish between waiving an overdraft fee and being a truly fee-free institution. It takes a lot of explanation to get people to believe us with respect to, when we say fee-free, this is what we mean. It is still a struggle to get consumers to understand the extent of what we mean when we say fee-free, and then to understand how that translates to their lives.

CU Times: How much has Amplify saved members so far by eliminating fees?

Armijo: $2 million was the amount of fee income per year we had when we started this process, and we’ve been fee-free going on two years now, so we believe that to be a $4 million giveback to our members in fees we would have otherwise collected. In the year we went fee-free, we compared it to a patronage dividend, and on a per-member basis, the amount of money we didn’t collect from our members would have equaled the second-largest patronage dividend in the credit union industry at that time. So our theory is we’d rather let you keep it instead of take it from you and then give it back, and fee-free benefits members across the board, whereas a patronage dividend benefits those who have the most the most.

CU Times: How has the elimination of fees impacted Amplify’s profitability? (In a previous interview, you noted that Amplify’s drop in ROA from Q1 2022 to Q1 2023 was due to the industry-wide fall in non-interest income from sales of mortgages and other loans.)

Armijo: The change in our ROA was all mortgage-driven, and specifically, the change in non-interest income.

So how our business model works is, we originate the mortgage, we sell it to loan investors, we retain the servicing so the member stays our member, we service the loan on behalf of the loan investor, and they pay us servicing income. So the two aspects of non-interest income there are when we sell the loan and then the ongoing servicing income. And that’s the piece of income we expected to vastly make up for the income we gave away. Putting that in perspective, had our mortgage production continued the way we expected it to before rates had this huge increase, we would have collected more non-interest income from loan sales and servicing in one month than we gave up for the entire year in this type of account service income. So we’re still able to make it up because the scope is so much larger.

CU Times: What results have you seen since February 2022 in terms of how Amplify has been able to make up for the lost fee income?

Armijo: What we looked at over the course of a year after we launched was, did we grow checking and savings accounts faster than we would have otherwise? We don’t want to take credit for growth we would have gotten anyway. So we looked at growth above baseline, and it was challenging to define a baseline through COVID, but what we decided was the baseline was the average of the prior three years – 2019, 2020 and 2021. What we found a year after going fee-free was the checking and savings accounts grew somewhere between 5% and 8% faster than they otherwise would have, based on that historical baseline. Now these are small numbers, but one thing we said from early on was we expect this to be a slow burn, not a big bang. We knew it was going to take the market some time to understand what this is, care about it and want to do new things with it.

CU Times: How is Amplify communicating to members and nonmembers the uniqueness of its fee-free status?

Armijo: What we’re finding is the marketing channels that work for us on the lending side are not as effective for us on the deposit side. For example, we did an aggressive digital marketer for a long time. But when you have a little square to get someone’s attention, and you have to boil down what you’re trying to say in a few words, if what you’re trying to promote is the availability of a product they want at the best rate that’s easy to do. If you’re trying to communicate a complicated industry differentiator, it’s much harder.

So what we’ve been leaning into are high-fidelity environments, like sponsoring a chamber luncheon so we have the opportunity to give welcome remarks, where we can talk about the positive community impact of fee-free and what this really means. Again, it’s a super slow burn. It’s not a lead generation strategy that’s going to turn around for you in a couple of weeks.

We’re also really leaning into our community banking program, which we launched in the middle of this year. We have community bankers who go into community organizations to do educational sessions, and provide onsite banking services to the individuals within these organizations. The reason why these organizations want to collaborate with us is because it is impossible for the clients they serve to ever incur a fee. These are the folks who if they accidentally get two or three overdraft fees, it will put them into a cycle of poverty. So partnering with a banking institution that makes it impossible for that to be a liability for their clients is what gets them involved. So where we’re really heading is connecting with community organizations as conduits to the people they serve who need this.