DES MOINES, Iowa-Given the Consumer Financial Protection Bureau's interest in overdraft pricing and the likelihood interchange income will decline, are credit unions ready to fill the gap resulting from what could be a sharp drop in revenue over the next three years?
That's a question more than one industry analyst has been asking CUs this year, and for good reason, they insist.
"You have more pressure on fee and non-interest income than I have seen in some time," said Jeff Russell, senior advisor for The Members Group, pointing to the CFPB's growing overdraft focus that could significantly reduce the price of that service, and the fact that merchants, now a bit happier with interchange savings from the big banks, will soon focus on smaller issuers. Credit interchange, too, will likely come under fire. "This situation does not feel like it is changing, so credit unions have to develop alternative revenue streams-come up with plan B's."
But a number of analysts are divided as to whether credit unions, despite facing already thin margins, are prepared for a significant cut in revenue, at least a 25% reduction, according to some forecasts. Michael Moebs, economist and CEO at Moebs $ervices, Lake Bluff, Ill., noted the average CU is driving 75% of total fee revenue from overdrafts. A number of industry analysts spoke with Credit Union Journal about potential strategies to offset a further revenue decline, including daily deals (see related story).
Russell contended the most important step a credit union can take today is to assign the right person to focus on alternative revenue streams. "I advocate it should be someone outside the senior management team, only because senior managers are so busy. Find someone, a bright and innovative person in a branch or department."
Four Strategies To Pursue
Credit unions better be dedicating resources to the challenge ahead, insisted Moebs, who predicts the CFPB could cut overdraft prices if FIs don't take action now to demonstrate they are managing this service wisely and with consumers' interests at the forefront (Credit Union Journal, June 18).
"In a worse-case scenario, there could be a significant drop, over 50% in overdraft revenue, from the CFPB actions," warned Moebs. "And this will result in a significant loss in the number of credit unions and the number of jobs."
Moebs believes CUs are not prepared for a big loss in fee revenue and is advising four strategies be pursued by year-end to offset potential declines:
* Seek additional fee revenue from non-members.
* Seek new service sources of fee revenue and make fees value driven by reducing fees for members who use more self-service channels.
* Reduce expenses.
* Drop the overdraft fee below $20 to increase volume.
A Different Perspective
Bill Handel, VP of research and development for Raddon Financial Group, attacks the problem from a different perspective, saying it's time the industry takes a systematic approach to product pricing by developing a "cogent" pricing policy that spells out specific pricing steps that will be taken based on what the financials look like.
"You have earnings and margin pressures, both are stressed," said Handel in a previous report (Credit Union Journal, Aug. 6). "CUs have to be much more effective in how they manage the spread side of things."
Dennis Dollar, principal at Dollar Associates, Birmingham, Ala., believes the answer lies in the fact credit unions have a lot of room to grow checking penetration with existing members.
"That is credit unions' saving grace. The average credit union has a 42% checking penetration rate with its own members," observed Dollar. "There are 58% of members who don't use the credit union's checking account as their primary checking. There is the possibility credit unions can make up in volume much of what they lose in fees."
However, difficult decisions may need to be made, asserted the former NCUA chairman, if the CFPB comes back with tough guidelines, a "worse-case scenario" that caps overdraft fees at $5 and limits total overdrafts assessed per consumer to six per year. "
We will simply revert to bouncing checks again, return to the era of the NSF fee, prosecute bad check writers, and have people put groceries back on the shelves because the transaction was turned down," said Dollar.
Credit Unions Lagging
One strategic planning consultant, asking for anonymity, said that whatever the steps, they need to be looked at now. "I work with a number of community banks and credit unions, and I don't see credit unions addressing the potential revenue decline. The community banks are making plans, they're aggressive. Credit union CEOs, from what I have seen, don't have the fire in their bellies now. I don't see it. And they may not be ready for what's coming."
But they better be, reminded TMG's Russell. "The pressure is coming from all sides, debit, credit, overdraft," said Russell in a previous report (Credit Union Journal, Aug. 13). "How these things get replaced has to be a question more credit unions ask, and solve. Add in the low-rate environment and spreads decreasing, and CUs need to address this now. It's not a burning crisis platform. But if you have not done your planning at a point in time when this becomes a burning crisis, you will have fewer options."
For info: www.themembersgoup.com, www.raddon.com, www.moebs.com
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