Today in financial services banks and credit unions are waking up to their new reality. Big Banks are now in the position of having to wring more revenue out of customer accounts. The new trick and question on the table is how to justify new ways to raise fees on basic products like debit cards, ATM machines and checking accounts.
This new focus comes as many financial institutions brace for as many as 200 new regulations that could hit the books in 2011. Many of the new regulations will focus on reducing the fees that can be accessed by financial institutions on consumers. The end result is in my opinion a mixed bag for consumers and for credit union members. I fully believe this is the year that many bank credit-card users will experience higher inactivity fees and foreign-network exchange charges, while free checking accounts will simply fade into memory.
In a recent article in the Wall Street Journal author Robin Sidel wrote, “To counter that lost revenue, banks are thinking about imposing annual fees of $25 or $30 on debit cards, according to people familiar with bank strategies. Some are also considering limiting the number of debit-card transactions that a customer can make each month, these people said. Another idea circulating in the industry: Limiting the size of a purchase that a customer could make with a debit card. At the same time, reward programs for debit cards are likely to get the ax, these people say.”
This mad scramble for lost revenue will be even harder for credit unions as they have built their reputations on being less fee- centered than Big Banks. Sadly this becomes a more pressing issue as it is the smaller credit unions that are still expected to compete with the products and services of Big Banks. Following “the stampede” to fee on basic services is a mistake that will hurt those members who can least afford the fees. It is low income members who will suddenly face new fees because they can’t maintain higher deposit balance limits or use self service access points like online banking.
The challenge for 2011 is how do credit unions pay for services with limited capital, share insurance premiums, and tighter margins as interchange income looks to be slashed as new proposals, part of the Dodd-Frank financial-overhaul bill , cap interchange at twelve cents a transaction become part of the new reality of 2011. By some estimates that could represent a reduction of about 84% from the current average rate of 44 cents.
The answer comes in a change of perspective and a wiliness to challenge standards that for many of us we never thought we would challenge. As a industry we have to look at premium value added services. This idea hit me as my wife and I were joining a gym. Editors Note: Yes, I like millions of others around the world have already joined a gym hoping that this year it will “really take” and that I won’t quit in two months.
As my wife and I were filling out the paperwork the size of the gym and the types of equipment really impressed me. How could they afford to offer this gym with no contract for only 1 dollar down and ten dollars a month? Now many of you probably already see the business model behind the gym membership special. By charging a low cost of entry fee and low monthly maintenance fee the number of people opting out of the gym is not tied to the number of people not using the gym’s services. Most people will cancel a gym membership if the cost is too high and they do not feel they are getting the value they thought they would.
However, with a low cost model this gym is counting on people continuing to pay the membership dues even without going to the gym. The ten dollars a month membership fee goes from being “membership dues” to “membership I will take advantage of tomorrow.” Simply put at ten dollars a month the membership is worth it to say, “I belong to a gym that I might use next week if I feel like it.” Ten dollars buys me convenience and peace of mind that I am not giving up on my goals. So what happens is that the many are now paying the membership price of those who actually use the gym on a regular basis. This sounds shady when you say it like that. I am not prosposing charging members for services they don't value or need. Yet, that is exactly what most credit unions do when they do not pass cost for premium value added services that do not pay for themselves.
For credit unions to offer premium services "free of cost" to a small select group of users (for example those 5 to 10 thousand members who use your PFM) and to then to pass that cost onto the whole membership is in fact doing what the gym does. You are charging members for a service that they are not using. Think about it... in the past if most credit unions were to consider offering personal finance management for online banking or adding the new iphone app for the small percent of members using mobile then the whole membership would bear the price of those costs as the credit union added those service costs to its operating expense which places pressure on credit union margins in loan or deposit rates.
Perhaps it is time to rethink this model. Two years ago the concept of free checking was considered table stakes for most financial institutions. Today the reality has changed. An example of this shift in mindset is being seen as credit unions exit 2010 and enter 2011 with new product offerings that are no longer free.
Take the recent headline in Netbanker which comments on Unitus Community Credit Union, a credit union with around 70,000 members and over $800 million in assets, as it unveiled its new personal finance management tool, “Total Finance” in late 2010. After, a 30-day free trial, members pay $2 per month for the service.
In years past the pitch would have been to make this service free as it makes members more “sticky” to your financial institution. The reality is that this sales pitch has been the highlighted bullet on PowerPoint sales presentations from vendors for far too many years. Credit Unions have been investing in bill pay, WAP mobile banking, electronic statements, account aggregation, credit score monitoring, electronic billing, and Short Message Service (SMS) text banking all with the same pitch line, “This makes your members stickier.”
This year we will see credit unions begin to identify value added premium products and services and then pass those costs along to those members who want to opt into those services. At economic cooperatives this model seems fair to me. Offer free mobile and SMS text banking but if people want the newest DROID application with built in personal finance management with remote check deposit then you have those members opt into that. You share the cost with those members who value the service without passing the expense to the rest of the credit union membership by lowering rates of deposits or raising rates on loans.
After all I would have never have though you could redefine my favorite old west character Roster Cogburn. Yet, there I sat in the movie theater eating my popcorn and not once did I remember that this movie was a remake. I got exactly what I paid to see a story about my favorite US Marshall and left satisfied. The difference was in how the makers of the movie had defined the character.
This same challenge is what credit unions have to face in 2011. How are you going to add premium services with less non- interest income with loan rates at historic lows? Many people will see this issue differently but make no mistake the line is crossed and now others will follow. It is not a question of when only a question of who and how do you keep up.
No matter what side of the isle you find yourself on you now have to answer the question on the table. If you don’t charge can you add that new app or service and what will happen if your members don’t see you keeping up with the services they want? If you do charge do you risk public outrage by bloggers and disgruntled members who see you as adding fees? No easy answers on this. Regardless of where you fall on the issue you will have to have True Grit to stick to your position.
I believe that your observations and insights are correct. For me, it highlights the need to make the members aware of the overall value they receive from the credit union. As noted, sharing the cost of premium products/services requires a paradigm shift on the part of the credit union. I also believe that it will require a paradigm shift on the part of the members. Helping the members shift their paradigm will only occur as credit union employees help the members view the changes as part of a total value proposition.
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