MADISON, Wis.-Credit unions can expect about a nine-basis-point ROA hit from the new overdraft rules that take effect in just about 30 days, according to a new Filene Research Institute study.
That will be tough for some CUs to handle, especially the sub-$100 million credit union that often finds ROA tough to come by. But the report suggests that the new overdraft environment may boost the attractiveness of credit union checking accounts in comparison with banks'.
Those are among the key findings of Georgetown University law professor Adam Levitin, who authored the study titled "Overdraft Regulation: A Silver Lining to the Clouds?" The silver lining could be that as banks seek to offset lost overdraft fee income, they will begin to eliminate free checking, which plays into a CU strength, suggested Filene Executive Director Mark Meyer.
"The primary message in the study is that credit unions should try to stay the course with free checking," said Meyer. "In many cases, credit unions have been much more consumer friendly than banks and have been used to operating with lower fee income accounts. Although the drop in overdraft revenue is a blow to credit union fee income, it will hurt the competition more."
According to the study, which surveyed 185 CUs, in a worst-case scenario in which credit unions lost all overdraft revenue from debit and ATM transactions, that would come to a 9-basis-point reduction in ROA. Levitin arrived at that figure after looking at the amount of credit union overdraft revenue from debit and ATM transactions from 2004 through the second quarter of 2009.
Levitin suggests a number of responses:
• Bundle accounts to introduce different revenue streams into standard transaction accounts.
• Offer only the basics for free with a la carte pricing for additional services or product features.
• View repeat overdraft abusers as potential long-term clients rather than an immediate source of fee income. Members who repeatedly overdraw present an outreach opportunity: these members may be in financial distress and could benefit from affordable short-term credit, such as a payday loan.
• Simply live with the diminished margins. The worst-case implications of the overdraft rule would entail a tangible drag on earnings, but it should not destroy the current credit union business model.
Meyer warned, though, that the overdraft legislation in the House and Senate, which proposes more sweeping changes-requiring consumers to opt in for all overdraft coverage and would limit overdraft fees-poses a much greater threat to the credit union bottom line.
Meyer said that it is time to recognize that, fundamentally, how financial institutions make money is changing. "It's time to evaluate current processes and look for new opportunities to innovate. What's occurring with overdraft is more than a nudge. It's a look at what's coming in the changing of the financial business model."
