CEOs Mull How To Respond To Reduction In Interchange
HARRISBURG, Penn. — The threat of a 70% reduction in debit interchange in 2011 has credit union CEOs already formulating plans to make up for lost revenue if in the proposed new interchange rules take effect.
Everything is on the table, from eliminating free checking, to further reducing expenses, to raising fees and rates across the board. And the reason for the speedy planning is sound, according to Pennsylvania State Employees CU CEO Greg Smith, who likened the potential revenue cut to a "second NCUSIF premium."
At PSECU, more than $7 million annually is at stake, estimated Smith. "I suppose that PSECU could absorb such a charge, we're netting about $36 million this year after all other charges. But at some point we might be forced to look for other ways to offset the lower income."
Smith said PSECU is fortunate it has never relied heavily on fee income. "It's almost like a squirrel with a bunch of nuts hidden away for a cold winter. For example, we don't charge members a foreign ATM fee."
PSECU members perform about 760,000 transactions each month but only 160,000 are on proprietary ATMs. Smith surmised the credit union could apply a foreign ATM fee of $2 and still be competitive. The move would bring in $14.4 million a year. "We also provide members a rebate of their foreign surcharges at an annual cost of roughly $2.5 million," added Smith. "We could modify or eliminate that."
PSECU still offers free checking accounts. With 200,000 checking members a $5 fee would net $12 million per year, Smith explained. "Adding all those together brings about $26.5 million, which would more than cover the interchange loss. Having said that, my board will be like Charlton Heston with that rifle in his hands talking about the Second Amendment if I propose any of the above changes to our fee structure. Raising those fees is not a proposal I would look forward to presenting to my board."
Here's a look at strategies being mulled by other credit unions:
Strategy #1: Combination of Little Things
RANTOUL, Ill. — A combination of many small moves will be the plan at the $680-million Credit Union 1 if interchange rules go through as they stand. CEO Paul Simons said the credit union has made $1.4-million on debit interchange in the first 11 months of 2010 and the proposed cuts would take over a million of that money.
"You are somewhat limited by your competitors as to what actions you can take. We can't turn around and charge an annual debit card fee if no one else is. So it has to be a combination of little things in order to make up the difference-raising fees across the board, raising interest rates slightly and lowering dividend rates a little. Maybe cutting back hours."
Strategy #2: Remain Fluid
ST. JOSEPH, Mich. — Gary Easterling, CEO of the $1.1-billion United FCU, is taking a wait-and-see approach. "There is so much fluidity in the situation we have decided to slow roll these regulatory changes. By that I mean we will comply, but we will not pass along the cost to our members immediately. This will have a financial impact, but we don't want to drag our members through the tacking duel that is likely to occur with the cycle of rule writing, commentary periods, and the impact of a new Congress. We are watching other financial institutions jump out with changes to their checking accounts. We know, as the current proposed rule is written, free checking is likely dead."
Strategy #3: Cut Costs
SAN FRANCISCO — If San Francisco FCU needs to make adjustments, the first steps will be reducing expenses and adding revenue-generating services, according to Steven Stapp. Even with already low operating expenses there may be room to cut costs, and that adding investment services would be strongly considered. "For us it's looking at adding services and programs rather than charging new fees or increasing the ones we have."
However, a 12-cent cap would cost SFCU $30,000 month "That's a big blow," he said, noting that the $735-million CU does not rely on fee income, but if it had to add fees, it would first look at fees currently being charged that are underpriced in the market.
Strategy #4: Diversify Income
MASSENA,N.Y. — Scott Wilson, CEO of the $400-million SeaComm FCU, said that if the Fed forces the CU's hand, it will first consider solutions that do not adversely affect membership.
"We will become even more prudent at diversifying our interest income streams, obviously improving on our cross-sales with specific emphasis on our lenders development products through CUNA Mutual and other areas of opportunity, including commercial lending. As time goes on, and we see how deep this will impact our net margin, we may have to look at other alternatives. We are really in the preliminary stages."
Strategy #5: No More 'Free'
SPRINGBORO, Ohio — The $190-million River Valley CU's free and high-interest checking accounts would likely see some adjustments if a 70% reduction in debit interchange happens, said CEO John Bowen. Worst-case scenario has the CU losing $350,000 annually. "Basic free checking would likely go. And this might filter down to higher fees...across the board."