GLENDALE, Calif.-"From interchange to shortchanged" is how one credit union CEO summed up the results of last week's Senate vote that defeated a proposal that would have delayed cuts in debit fees being enacted by the Federal Reserve.
The Fed is now expected to enact a final rule that will direct billions of dollars of cuts in debit fees that are required under last year's Wall Street reform bill. The bill requires the cuts be implemented by July 21.
Credit Union Journal spoke with a number of CU CEOs following the vote, most sharing disappointment with how the decision will affect members and holding onto thin hopes that the $10-billion carve-out will work. Many also believe there is little chance the suit by Minnesota's Twin Cities Financial Bank to force the Fed to halt its rule making will succeed.
Despite commenting that the Senate vote has shortchanged CUs, Stuart Perlitsh, CEO of the $300-million Glendale Area Schools FCU, said the outcome underscores that it's time many credit unions get away from relying on interchange and other fee income.
"A simple analysis of 5300 data reflects several credit unions would be negative but for the fee income they generate," said Perlitsh. "Interchange income has become a huge cash cow for several credit unions and reliance on it is proving problematic. That trick won't play much longer."
Perlitsh stressed that credit unions need to focus on improving operating efficiency and reducing operating costs. GASFCU, Perlitsh shared, produces more than 1% ROA behind a business model in which operating costs and fee income are half peer averages. "Our business model does not rely nor depend on interchange income. We embrace providing value to the membership without a fee shakedown."
Little Faith In Two Tiers
Having little faith the two-tiered payment system will work, CEO Rob Givens conceded fees will have to be added at the $450-million Mazuma CU in Kansas City, Mo. But they won't come via a blanket move. "We will try to avoid across-the-board hikes in checking account fees, dormant account fees, and so on. We will focus on areas where adverse member behavior causes increased staffing, additional technology expenses, or delays and costs for other members. The other option is to avoid programs such as checking account rewards unless they pay for themselves. We do not want profitable members subsidizing unprofitable ones."
In Cincinnati, Steve Behler, CEO of Kemba CU, stated that if the $10-billion exemption does not work for small issuers, the $480-million credit union will cut expenses and services while eliminating portions of its 3.5% APY checking account. "An elimination of an interest-bearing checking account is possible while the fee structure of the institution would be forced to change."
At the $226-million Eagle Legacy CU in Arvada, Colo., members won't feel the effects of Durbin this year, according to CEO Sundie Seefried, but they will in 2012. "We will absorb costs in 2011, accept lower earnings, and then take action to compensate by year end. We obtained approval from our board to increase and implement a few fees the first quarter of 2012 and at the same time offer a member-friendly checking account with a monthly fee that offers options to exempt members from the fee. We will begin educating members and selling the checking account option fourth quarter this year while educating them on why this is necessary. Free checking will still be an option, but the new option will definitely be more attractive."
Support For Assessment
Evan Clark, CEO of the Washington-based Department of Commerce FCU hopes that as a result of the Senate's vote more credit unions will support the voluntary NCUA corporate assessment. "This will be one way to substantially improve our bottom lines for the next two years."
Meanwhile, Clark said the $250-million DOCFCU will increase some of its fees and trim back member rewards slightly. "These changes will be presented to the board this month and implemented in July. They should be more than enough to compensate for the loss of interchange revenue."
The $360-million BMI FCU in Dublin, Ohio, will wait and watch the competition before making any moves, said CEO Sharon Custer. "We suspect that Chase and Fifth Third will be instituting some big changes. We are going to hold back at first and then make whatever changes we feel are appropriate to be competitive."
Laida Garcia said the $316-million Florida Central CU in Tampa will take things slowly, as well. "We will wait and see how we will be impacted and then move to take action by either reducing checking account dividend rates or imposing a monthly checking account maintenance fee," said the CEO.
There will be no waiting at the $480-million Michigan First CU in Lathrup Village, Mich., according to CEO Michael Poulos who told the Journal last week, "We will begin notifying members there will likely be a repricing of checking accounts and debit cards when the Fed rules are released. We are prepared, but saddened that we have to take these steps."
A Difficult Pill
The failure of the Tester-Corker bill to pass was a "difficult pill to swallow" for Arthur Kremer, CEO of the $270-million Sharefax CU in Cincinnati. "I am extremely disappointed that, even with our colossal efforts, credit unions and other financial institutions could not make our case resonate with enough senators to delay implementation of the interchange cap."
"I'm very disappointed by the Senate vote," concluded Garcia. "I believe that all credit unions, regardless of size, will be adversely affected by this decision. At this point, no one knows exactly how the Durbin Amendment will affect credit unions or when the impact will be felt. But, one thing is certain-the member will ultimately pay the price."
A massive repricing of banking services that will affect literally every American is what's now coming, concluded Poulos. "It will have social consequences in that previously underserved and low-income members will probably not be able to afford basic banking services. A number of smaller banks and credit unions may have trouble surviving under the new rules."