Analysis: Durbin To Force Job Cuts, Expanded Fees
LOMBARD, Ill.-To make up for a 73% loss in interchange revenue, a $750-million CU will either have to cut 18 employees, lower deposit rates by 16 basis points, impose a $6.08 monthly fee on checking balances below $1,000, or add a monthly $3.65 debit card fee.
Those are numbers Raddon Financial Group assembled to demonstrate what the proposed interchange rules may force some credit unions to do. Any way they look at it, CUs are faced with some very difficult decisions, according to Bill Handel, VP of research and development.
"I don't think the industry will lay off 11% of its workforce, even though the cut could be justified by the interchange loss. But I think credit unions need to see what the true impact could be."
Handel's 11% jobs reduction total assumes a CU has $4.5 million assets per employee and $65,000 in salary and benefit costs per employee. The $6.08 checking fee assumes that 60% of the credit union's checking accounts have balances of less than $1,000.
A number of CEOs interviewed by Credit Union Journal for this story agreed with Handel that job cuts are not possible, and will look to other areas, primarily checking and punitive fees, such as NSF (see related stories). However, that stance runs counter to what some CU leaders said during CUNA's GAC, stating that job cuts are a distinct possibility (CU Journal, March 7). At least one economist believes credit unions need to shed 6,000 jobs this year.
Handel believes the industry will be more inclined to consider cutting deposit rates, eliminating free checking, or adding a debit card annual or per-transaction fee. "In putting these numbers out, I am suggesting that every institution should be doing the same type of modeling, and understanding the true magnitude of the interchange rules on their individual organization."
Handel believes many CUs are unprepared.
"Some credit unions are being misled by the exemption (under the Fed's proposed interchange guidelines) for financial institutions with assets under $10 billion. I think a lot of community credit unions think this is an opportunity because the big banks will be limited on interchange, charging more fees and moving away from free checking, giving them the chance to steal market share. I think the lack of clarity in terms of what the exemption truly means is what is most troubling for the industry."
Handel contended, however, that if the new rules go through as outlined, credit unions will have a one- to two-year window when they will collect interchange fees at a higher rate than big banks. "But the gap will shrink."
Credit unions, Handel advised, need to begin planning long-term, becoming more operationally efficient-as the industry has shown it is capable of doing-and finding ways to drive profitability. Checking, Handel pointed out, is still making money. Yet if interchange diminishes that profitability, CUs could still keep free checking, but "You can't make it a loss-leader unless you put really strong metrics in place and use checking to cross sell a bread basket of products."
Mike Moebs is not a proponent of adding fees, especially at a time when big banks are shedding checking accounts credit unions can scoop up. The economist and CEO of Moebs $ervices in Lake Bluff, Ill., believes expense reduction is best to counteract a sharp drop in interchange revenue. The Durbin amendment will cost CUs $650 million annually, projected Moebs. "And credit unions will need to cut their workforce by 11%, costing the credit union movement 6,000 jobs this year in order to make up the difference on the expense side."
There is another alternative-lowering overdraft fees, Moebs pointed out. A seemingly "counter-intuitive move," lowering the overdraft price can significantly increase overdraft revenue, Moebs research has shown (Credit Union Journal, Sep. 20, 2010). "We have found that when a financial institution lowers its overdraft fee below $20, overdraft volume goes up significantly. This will add enough to the bottom line to offset Durbin."