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Not All Growth Is Good

According to a recent Wall Street Journal article (‘Free’ Checking Costs More, 9/24/12), “free” checking accounts are on the decline. The article cites a Bankrate survey of banks indicating that just 39% of non-interest checking accounts are free to all customers, down from a peak of 76% just a few years ago in 2009. Banks have increased minimum balance requirements, overdraft charges and monthly service fees. They have also increased ATM surcharges. According to the banks, the increase in fees is needed to offset the stagnating economy and new regulatory burdens.

Credit unions, too, are operating in the same environment. Low interest rates, lackluster loan demand, and increased regulatory burden are squeezing credit union earnings. The increase in “free” checking fees at banks may drive more of their customers to credit unions. If this happens, it would be a mistake for credit unions to assume that growth in checking accounts naturally leads to increased profitability. It will remain important to understand what other products new members are using and the number of transactions they are performing. Additionally, threats to interchange income and overdraft fees remain and could change the profitability of checking accounts in the future. In the end, credit unions need to stay focused on growth in the target market. Not all growth is good, not even when it comes from checking accounts.

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To Grow Or Not To Grow—What? Is The Question

For credit unions that are growing deposits faster than they are growing loans, the question often asked is “what do we do with the money?” Perhaps the question should be changed to “should we have the money in the first place?”

While it may seem that no matter how low deposit rates are taken money still flows in, are deposit rates really that low?

Consider a credit union paying 25 basis points (bps) on money markets.  While that may sound low, recent yields on some of the largest uninsured money market mutual funds have been between about 1 to 4 bps, according to Bloomberg.  By comparison, this “low” rate paid by the credit union is about 6 to 25 times greater than what the consumer can get in the market—and it’s insured.

The point isn’t that credit unions should drop their money market rates to the same level as the mutual funds, but to point out that, even at these low rates, 25 bps can still be attractive considering the alternatives.

Some credit unions have instituted relationship pricing, rewarding members who participate in the cooperative and encouraging those who don’t to leave.  Others have identified that the growth is coming from their target market(s) and feel that they have the net worth ratio to “ride it out” for a while.

If your credit union is growing deposits faster than loans, at least two things you should know about the growth is:

  1. Who is bringing in the money?
  2. Why?

Growth that is coming from the target market(s) can provide opportunity, if not now, then in the future.  Growth that is coming from members parking funds may be money that should be discouraged or limited.