Credit unions without courtesy pay programs are missing out, according to one CU manager here, where fee income from overdrafts has increased up to 110%.
"There is a very small fraction of credit unions that look at courtesy pay as gouging the member," said Brad Knutson, vice president of information systems with at Alcoa Employees and Community CU (AECCU). "They don't understand how a courtesy pay program works and how it's a win-win situation for the member and the credit union."
As operating expenses continue to outpace interest income, the industry buzz is that courtesy pay programs may help reduce some of the squeeze in margins. Callahan and Associates, for instance, noted that such courtesy pay programs are coming on the heels of projections that fee income will decrease 6%.
Courtesy pay programs are a legitimate source of non-interest income, according to Knutson. "Members will always run tight on their expenses. And members are still going to write checks they don't have the money for, or they will go out to payday lenders and get money. The cost of writing bad checks or dealing with payday lenders is very high."
One $25 Fee
The $118-million Alcoa Employees and Community has responded by paying members' bad checks, Knutson said. Members with share draft accounts-about 39% of AECCU's membership-are spared the merchant's and credit union's multiple bounced check charges. "With courtesy pay there's one $25 fee and it's over," he added.
Losses resulting from courtesy pay have been minimal, said Knutson. AECCU anticipated losses of 7% of gross NSF income, or about 70,000 per year. Actual loss has totaled $25,000, of which the credit union recovered $17,000.
"Our losses have been much less than what we anticipated they would be," he added. "And they are offset by fee income of at least 90 %.
At the same time, AECCU is bringing in an average of $83,000 every month from its year-old program. And Knutson is pretty sure the CU's newest platform will push income even higher.
After 10 months of funneling its courtesy pay data from USERS, Inc.'s DataSafe core system into a third party courtesy pay software, the 21,000-member credit union switched to USERS new Courtesy Pay Manager.
Knutson said fuller functionality under the USERS software will bring in an additional 10%.
And there are other benefits. "Before Courtesy Pay Manager, we couldn't create different tiers for members based on the relationship and risk," Knutson explained. In addition to automatically managing relationship and risk tiers, the software enables coverage from both overdraft protection and courtesy pay.
"Underneath USERS' standard processing, we could clear a draft either with overdraft protection or courtesy pay, but not with both," Knutson continued. "But with Courtesy Pay Manager, we can combine the two and provide additional protection to the member. We have the ability to make the courtesy pay program function more like we'd want and what members would expect."
Worth The Investment
Whereas the fee for courtesy pay is $25 per check, AECCU charges members $3 per check for overdraft privileges.
Courtesy Pay Manager integrates with Microsoft Word for generating courtesy pay and overdraft notices. Reports are saved via an interface with AECCU's optical disk storage system. The better platform is, of course, costly. "The USERS product was not cheap, but we wouldn't have done it if we didn't think we could get even more out of our fee income," Knutson said.
AECCU paid $45,000 for the USERS software and installation. Ongoing operational and regulatory support is offered by third party courtesy pay program provider Alliance Solutions, LLC.
