Is this credit union ahead of the curve on overdraft fees?
With fee income already down year over year, Milwaukie, Ore.-based Providence Federal Credit Union is preparing for another decline after cutting overdraft and NSF fees in half.
The $137 million-asset institution reduced those charges earlier this year after determining in 2018 that some members were incurring overdraft fees and struggling to maintain their account balance. Both fees were reduced from $30 to $15.
President and CEO Shirley Cate said the decision did not come easily. By lowering these fees, the board understood that Providence FCU’s bottom line would drop drastically. However, the idea of giving back to members was a good reason to make the change, Cate said.
While call reports don’t specifically break down fee income by type, fee income as a whole at Providence FCU is on the decline. Total year-to-date fee income was down by about 11% as of June 30, dropping from just under $429,000 to slightly less than $380,000. Total fee income at the end of Q2 2017 was about $424,000.
Credit union officials did not disclose any predictions on how the new fee structure would cut into the bottom line. Aside from the fee that goes along with the new courtesy pay program, Providence FCU has not implemented any new fees to make up for the projected decline, but Cate indicated that the credit union has enough capital to provide a cushion. With a net worth ratio of 12.86%, it meets NCUA’s definition of a “well-capitalized” credit union.
“As members start utilizing courtesy pay, the NSF fee income that we're losing or not seeing, the courtesy pay will help alleviate that,” Cate said. “But we're not going to implement courtesy pay and charge all these fees. It was more about help our members and make their financial lives easier.”
About 32% active checking members have already signed up for courtesy pay, reassuring the board that they have made the right decision and there is a need for this service among members, Cate said.
Fee income trends
Providence FCU’s fee cut is notable for a variety of reasons. For one, the new fees are far below the normal level for overdraft pricing. According to a recent study from Moebs $ervices in Lake Bluff, Ill., the average overdraft price at banks and credit unions has stood at $30 for the last seven years. That same study, however, shows a lack of price transparency, with more than 50% of institutions not publicizing their overdraft prices.
Following the financial crisis and the start of a long-running surge in credit union membership, a host of institutions across the country reduced or eliminated a variety of fees as a way to differentiate themselves from the competition, though that trend has slowed in recent years.
Steven Reider, president of financial consulting firm Bancogrpahy, noted that credit unions’ relatively modest overdraft pricing – which rarely passes the $30 mark – ties back to the industry’s cooperative roots and not-for-profit nature. But he also suggested that most members aren’t likely to join or leave an institution just based on its overdraft fees.
And Reider said Providence FCU’s fee cut could be well-timed, particularly if the U.S. enters an economic downturn as some have predicted. With the nation potentially approaching a recession, he said, members are more likely to utilize overdraft services and short-term bridge loans. By rendering overdraft fee as low and as painless as possible, credit unions reinforce their unique position as mission-driven advocacy institutions to help members at reasonable costs versus them paying an exorbitant fee at a cash advance store, he added.
Industry-wide, fee income at credit unions continues to rise. The National Credit Union Administration’s Quarterly Credit Union Data Summary reports a total of $8.7 billion in fee income as of the second quarter of 2019, up 2.2% from one year prior. And Reider reminded that while overdraft fees are an essential part of an institution’s fee income, interchange and foreign ATM fees also play a part.
“Most credit unions have less than $10 billion in assets and they're not affected by the statutory cap on debit card inter-change income,” Reider said. “And as consumers continue to increasingly use debit card in lieu of cash payment, that revenue is going to naturally follow.”
Ancillary products continue to be a driver of noninterest revenue, reminded Brian Werger, director of CUNA Mutual Group’s TruStage insurance program. Not only do members need products such as home, auto and life insurance, but they are “sticky” products that most consumers are reluctant to change once they have them.
“If you develop products that members need and want, they’re going to purchase,” Werger said. “Then if you can earn income off those products, it’s just a better way of going about generating income.”