At a time when many financial insitutions are focused on boosting customers' trust in them, at least two credit unions are challenging industry assumptions about how much to trust members. But some wonder whether they're going too far.
These credit unions let members promise to deposit money into their checking accounts, and then credit the accounts for the amount pledged, letting members use the money as if it were already there. They're even paying interest on the promised funds. There is no fee for the service.
One of the two organizations, the Pennsylvania State Employees Credit Union in Harrisburg, lets certain members promise to pay up to $8,000 and start spending it right away. Greg Smith, the credit union's president and chief executive officer, said that bankers "just went nuts" when he explained his program at a technology conference. They also told him he was missing a fee opportunity by not charging for the privilege.
Pressured To Do Something
Smith's organization and the Pentagon Federal Credit Union in Alexandria, Va., say their members are trustworthy enough for the service to work. Furthermore, since neither institution has more than a few branches and automated teller machines-and since fewer and fewer large banks are accepting deposits from customers of foreign institutions-executives said they felt pressured to do something.
Members of the Pennsylvania credit union, which said it started the program and let the Virginia credit union emulate it, can visit its website and pledge to mail a check for a designated amount within 10 days. Their accounts will be credited as if the funds had already arrived whole.
The credit union has always used the honor system for accepting deposits at ATMs, in some cases giving people as much as $20,000 in credit. In November 2001 it introduced an online version of the program, Upost@home. Not all members are eligible-mainly those who have reliably been depositing checks through ATMs. The credit union starts members out with $1,500 in credit, and has gone as high as $8,000. ATM losses incurred through the trust program were "so insignificant that it dawned on me we have a very honest membership," said Tom Ruback, PSECU's vice president of card services.
"What difference does it make if you post through an ATM or a computer?" he asked. "The reality is they're both computers. And that's what got the process going."
Ruback's colleagues may have been enthusiastic, but others learning of the program expressed misgivings.
"That's a nightmare waiting to happen," said Tony Hayes, the managing director for financial services at Dove Consulting Group Inc. in Boston. "What's to stop a criminal from pretending to have deposited $1,000, withdrawing $1,000 in cash the next day, and never mailing in the deposit?"
Brian Arsenault, a spokesman for Banknorth Group Inc. of Portland, Maine, offered his two cents. "It lends itself to a form of check kiting," he said. "It just strikes us as a particularly risky way of taking deposits."
Arsenault said that Banknorth, which has 360 branches and 500 ATMs, does not need to rely on the honor system for deposit-taking.
Executives with Pennsylvania State Employees, whose members are far-flung, called the program both a major success and a necessity. About 18,000 members make around 180,000 deposits a month through the program using foreign ATMs. Of the $112-million of deposits that the credit union has accepted since the Internet version of the system began on a small scale in November 2001, it has lost only $2,000, Smith said.
Plan Included Assumption
He said his institution felt it would be riskier not to adopt the program. The credit union has 300,000 members across the country and internationally, but only 20 deposit-taking ATMs. The credit union's business plan has always used the assumption that its members could make deposits at other banks' ATMs, but most banks have stopped taking shared deposits because of the expense and hassle of handling noncustomer checks.
Concord EFS Inc.'s Star network, to which Pennsylvania State Employees Credit Union belongs, hiked its interchange fee for shared deposits by 38% at the beginning of 2002, according to Star. Some banks that still accept shared deposits have started surcharging those transactions, as has the NYCE Corp. subsidiary of First Data Corp.
For years executives of the Pennsylvania State Employees Credit Union had discussed what they would do if a large local bank such as PNC Financial Services Group Inc. stopped taking its customers' deposits. Every year at strategic planning meetings, "No one ever had a good solution," Smith said. "The typical solution would have been to deploy more depository ATMs of our own, which would have been more expensive, plus we don't own any property." The credit union has one main office and one branch. It was Ruback who came up with the idea of an honor system.
Moreover, the processing of Upost@home transactions is much less expensive for the credit union because it does not have to pay interchange to the acquiring financial institution. Once it receives a deposit claim from a member, the funds are made immediately available for withdrawal or the accruing of interest.
Pentagon Federal Credit Union's program, Trust In You, has been around for three or four months, according to a sales representative. Members start out with a maximum of $750, and if they prove their word is good they can deposit and have access up to $2,500. Pentagon also has a limited number of branches and ATMs, and its members are scattered at military bases around the world, so the program plays a similar role.
Fraud Has Been Rare
Smith said that fraudulent transactions through ATMs or the Internet are rare, and when they do happen the credit union strips the member's immediate availability privilege, unless there are extenuating circumstances such as a member's mailing the check late. Canceling the program because of a few bad apples would only penalize the whole membership, Smith said. Dove Consulting's Hayes said that if such a program could work it would most likely work in a credit union environment.
"Credit unions may be better positioned to do that than banks, simply because as member- driven organizations they tend to have a more tightly knit customer base," he said.
John Hall, a spokesman for the American Bankers Association, offered the following take on these credit unions' practices: "They're taking on increased risk and also providing service to their customers. It's a balance. They must feel that service outweighs the risk. Credit unions are facing the same barriers as community banks-a limited branch network and a limited ATM network, and they're trying to come up with different solutions."
James A. Hamisch, the executive vice president of the Co-op Network in Ontario, Calif., said that he was not sure just how many other credit unions have begun similar programs based on Pennsylvania State Employees Credit Union's model. "What I can say for sure is every time Greg [Smith] speaks at credit union gatherings there are many people taking notes," Hamisch said. "We do applaud his creativity."
