GREEN BAY, Wis.-There are few strategies as diverse within credit unions as overdraft pricing.
Approaches to pricing overdrafts are driven by a similarly diverse set of reasons, ranging from internal expense ratios to a need for greater fee income to philosophical positions related to overdrawing a checking account.
Among those at the low end is PCM Credit Union, where overdraft fees can be as little as $3. It argues the approach not only provides a very affordable safety net for members, it also makes money for the credit union. PCM CU's average OD charge is approximately $8, according to analysis by Moebs $ervices.
At the higher end is Mohave Community FCU, which charges $38 per overdraft, among the top 10 highest CU charges in the Moebs $ervices analysis. But Mohave Community FCU's fees are not the highest, with several credit unions in the Moebs' report charging $45 per returned item. All seven CUs charging $40 or more in the study did not return phone calls by press time-Campus USA, Florida CU, and Sunstate FCU, Gainesville, Fla.; St. Joseph's Hospital FCU, Tampa, Fla.; Bridgeton Onized FCU, Vineland, N.J.; Baker FCU, Phillipsburg, N.J., and Quorum FCU, Purchase, N.Y.
The Moebs $ervices statistical study covered 2,700 institutions (Credit Union Journal, Oct. 1), and showed no bank or thrift among the institutions polled charging more than $40. The median bank overdraft charge is $30, compared to a median CU overdraft charge of $27.
Long-Held Policy
PCM CU CEO Dan Wollin said his credit union has had its pricing for years. "We went to $8 four years ago, after charging $5. We will charge $8 only if we return a check, or if it is a debit transaction. So a lot of overdraft charges are only $3."
The $150-million CU offers a free checking account, and with the low overdraft fee Wollin said members don't often leave "for greener pastures," one of the reasons behind its thinking, he said, outside the fact the credit union does not like charging fees.
"Keeping checking members is very important," Wollin said. "Since we are a SEG-based credit union serving only five manufacturing companies, we don't have the ability to go out and get a bunch of new checking accounts each year if members start leaving our checking program."
Efficiency Is Critical
If the credit union is efficient it can price this way, says Michael Moebs, economist and CEO at Moebs $ervices, Lake Bluff, Ill., noting that further analysis of product pricing and operating expenses among the top and bottom 10 CUs in the study reveals a key finding. "Those that are charging the lowest overdraft charges are much more efficient credit unions. The data spells out clearly what is happening here: If you run your shop efficiently you can have low prices and can pass the savings onto your members. If you don't run the credit union efficiently, you get into the same situation as the too-big-to-fail banks-you will have higher expenses, which means higher prices for your members and you will not be as competitive."
Here is what the Moebs study found when looking closely at the 20 CUs that made up the top and bottom ten in his study:
* On average, the lowest OD price produces the same amount of net income as the highest OD price.
* On average, those CUs with the lowest OD prices have 51% lower expenses than those with the highest OD charges.
* On average, those CUs with the lowest OD prices have 33% lower loan rates or higher deposit rates than those with the highest OD charges.
* On average, those CUs with the lowest OD prices have 66% less fee revenue, but the same net income, than those with the highest OD charges.
* On average, those CUs with the lowest OD prices have 38% more capital than those with the highest OD charges.
Moebs lauded the work of PCM CU saying, "Their expense-to-assets is 227 basis points on an annualized basis. These guys have good control of their expenses."
Kennedy & Reagan
Wollin likened the CU's OD pricing approach to the philosophies of former U.S. Presidents John F. Kennedy and Ronald Reagan. "They believed in not charging a higher tax rate but broadening the base. And, if you lower your rates you will get more of something. Overall, our overdraft income is fairly good."
With 5,000 share draft accounts and 8,300 members, PCM has an excellent 60% checking penetration rate. The CU averages about $25,000 per month in overdraft income from ACH, POS, ATM, and checks. The average number of overdrafts per month is 4,600, producing an average overdraft income of $5.50 per occurrence.
"The slightly less than one overdraft per month on all share draft accounts comes out to about $5 per month income on all our share draft accounts," explained Wollin. "I'm sure this is not the highest average (by a CU) by any means, but certainly not the lowest either. We only return about 125 checks per month."
The downside to the pricing, he acknowledged, is it could encourage some members to overuse the service instead of managing their finances better. "I don't know that our strategy is the best for all credit unions, in that it does have some weakness to it. It can lead to a greater number of low- or negative-balance checking accounts, but we really don't lose much money from that."
Wollin noted that if members abuse the service, they will be counseled first, and if the behavior continues, their account will be closed.
To be able to offer a low OD price, Wollin said the credit union must have its operating costs under control. "We have just have one, small, 200-squrare-foot office, which lends itself to having less people and being more efficient. Our year-to-date expense ratio is 2.63%, and as percentage of income our year-to-date expense ratio is 52.45%."
Goal to Discourage Behavior
In Kingman, Ariz., Mohave Community FCU charges $38 per overdraft, gets very few a month, and does not make a great deal on the service.
But that is the way the $24-million credit union wants it, explained CEO Anne Riley, who said the pricing is meant to deter members from bouncing a check. "We do not want to encourage our members to bounce a check, and at this price most of them don't," said Riley, who explained that of the CU's 3,500 members fewer than 50 overdraw each month.
"You don't do a member a service by having pricing that essentially, allows them to bounce checks," said Riley. "Sure, the credit union benefits from the fee income, but there are other ways to get fee income without helping them to damage their credit and personal reputation. In Mohave County it's a serious crime to bounce a check. It's not a misdemeanor."
Riley said the $38 price has been in place for four years, when Mohave Valley bumped it up from $35, which was the price when Riley came on board 11 years ago. The CEO said the community has been hit hard by the economy, and that many members depended on the housing industry for work.
Riley said MCFCU has discussed dropping the overdraft price to a much lower level to get more activity. "But again, we don't do that because we want to discourage usage. That always comes out in our discussions as the predominant reason we don't lower our price."
Appropriate Decision
Moebs recognizes that each institution has its own strategies to meet the needs of its members. "For Mohave, its strategic direction is probably appropriate. They don't want to be in the OD business because of local restrictions and their view of their membership. So, they are pricing high as a penalty to deter usage. This rationale is a lot different that the too big to fail banks that price high because their costs are so high."
