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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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Caps On Debit Cards?

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A recent article from CNNMoney.com reported that JP Morgan Chase is proposing a cap of $50 (or $100) on individual debit card transactions in an effort to boost transaction volume.  Not surprisingly, they attribute the proposal to the pending changes in rates on interchange income.  Chase claims that debit cards will not be profitable for them with a 12 cent cap in place, which certainly could be true with the rising costs of fraud among other things.  In addition to the cap proposal, Chase is already testing $3 per month fees on debit cards and checking account fees of up to $15 per month in certain states.

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Threats To Interchange—More Than Just An Income Issue

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The financial services industry is still holding its breath awaiting the repercussions of the Durbin Amendment reforming debit interchange.  The initial threat for which many are preparing is a material reduction in non-interest income.  Although the amendment exempts financial institutions with less than $10 billion in assets, opponents argue that merchants will (of course) coerce consumers by any means necessary to use lower-interchange payment forms.  But what operational expenses might be involved?  While many are focused on the direct impact to the bottom line, there is also the challenge of implementation and the associated cost.

A recent statement from William Sheedy, a Group Executive for Visa Inc., noted that:

The Durbin Amendment will be expensive and challenging to implement and will likely require changes by all stakeholders from the point-of-sale through to the issuer.

The statement also mentions that the two separate interchange structures are compounding the issue—noting that the degree of difficulty in implementation will depend upon actions by all stakeholders in the system and, of course, the details of the final regulation.

This is just one more threat facing decision-makers.  Uncertainties that could result in significant financial pain can impact product offerings, service levels and strategic direction.  Our suggestion is to turn these high-level threats into opportunities to reevaluate your business model by test driving how life might be if a particular threat were to become a reality.  If the threats don’t materialize, the worst that happened is decision-makers invested more time to think deeply and strategically about their business.

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Person-to-Person Payments and the Rise of PayPal

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It’s no secret that advanced cell phone technologies have begun penetrating our everyday lives.  Consider that in the third quarter of 2010 alone, 81.1 million Android handsets were sold and 13.5 million iPhones were sold according to International Data Corporation (IDC).  Moreover, according to FierceMarkets, U.S. cell phone penetration reached 101% at the end of the third quarter, with almost 50% of all mobile device sales in smart phones (if you remove the demographics of those 5 years and younger).

This year, a new “bump” technology was introduced for iPhone and Android handsets that effectively allows two people to share information simply by bumping phones—including information which allows transfer of money between PayPal accounts.  If you have a few minutes, watch this clip to see how easy it is:  http://www.youtube.com/watch?v=X9RNJ2yywuk

What we find even more interesting about this payment model is the potential to expand beyond its current scope.  At a recent developers’ conference in San Francisco, PayPal unveiled enhancements to its payment systems, including applications merchants can embed on their websites and PayPal Business Payments (any size, non-credit card payment for only $0.50 per transaction).  In addition, USAA and Discover have already partnered with PayPal to offer P2P payments.  And all of this is happening at a time when, as the sluggish economy perseveres and small businesses continues to struggle, some merchants are cutting expenses by refusing credit cards or charging fees for their use.

What does this mean for your credit union?  As PayPal becomes a more primary means to pay for goods and services, will it have any effect on the way you serve your members?  Will younger generations be socialized to expect this type of capability?  How might interchange income be impacted?

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Consumer Behavior And Non-Interest Income

Last week, we identified some of the many threats to earnings. With regard to non-interest income, potential changes in regulation were identified to be a major threat. Building on that, here we would like to suggest changes in consumer (i.e., member) behavior as an additional threat to non-interest income. In these trying times, consumer behavior has evolved and people are spending less and saving more. Both of these actions sound like responsible things for consumers to be doing (and they are), but for your credit union, they likely translate into lower earnings. Many places we are working with are reporting decreases in both interchange income and overdraft (or courtesy pay) fees. Members are also working hard to deleverage themselves, leading to lower loan volumes and fewer late payment fees. Whether these are short- or long-term behavioral changes is a topic for debate, but, for the present, credit unions are feeling the impact.

If you aren’t already, make sure you begin to analyze the sources of your income inside and out. Do not merely look at your level of non-interest income as a whole, but understand the components of it and how they are changing. Many credit unions are seeing higher overall levels of non-interest income due to extraordinary mortgage originations. This extra income may be hiding declines in other areas, or increases in operating expense. While higher-than-normal levels of origination income may be helping your earnings today, they most likely are a short-term source of extra income. Sooner or later, interest rates will rise (no predictions here!) and/or the refinance boom will end and mortgage volumes will fall.