Dollar Offers Insights On What Reg E Might Mean
Credit Union Journal: What changes have already taken place as credit unions (and banks) prepare for Reg E?
Dollar: Credit unions and banks are getting ready for significantly increased scrutiny under the new Reg E rules. Compliance officers and third-party consultants are being charged with being ready to fully comply with the new rules, and credit unions are largely committing themselves to a continuation of their overdraft privilege programs within the confines of the revised Reg E.
It is changing they way credit unions are viewing Reg E, because they know that the scrutiny is going to be significant in their next examination after the effective date of the new rules, but I don't know of any credit unions that are abandoning their overdraft programs. Too many members like it and too much revenue is derived from it. The members would be spitting mad if their credit unions went back to bouncing their checks, and the regulators would be mad if earnings fall dramatically at a credit union.
Too many crucial constituencies are depending upon credit unions still being able to do overdraft privilege programs under the new Reg E-those constituencies are simply going to demand that the programs be done right in accordance with the new rules.
CUJ: One theory is free checking is likely to be a thing of the past at some institutions. True? What about other services that have been offered without a fee in recent years?
Dollar: If the number of members opting in to overdraft privilege programs in the early days of compliance with the new Reg E rules is any indication, the amount of losses is going to be less than feared.
If this is the case, Reg E may not be the cause of a major restructuring of checking accounts that eliminates free checking and begins to drive more fees for such features as online banking and bill pay.
The loss of interchange revenue, however, could bring about quite significant changes in how checking accounts are structured. In my opinion, the potential impact on interchange revenue from the recent legislative amendment will, if it is enacted into law, be much more far-reaching and long lasting than will the Reg E changes.
While it is quite possible that overdraft privilege can live in conjunction with free checking under the new Reg E, it is unlikely that free checking could survive a major hit to interchange revenue.v
CUJ: Will CUs need to push more strongly into small business lending and merchant services to replace lost revenue?
Dollar: Small business lending is an option that some will explore as a source of revenue to make up for some of the losses they will face possibly under Reg E and certainly under new interchange legislation.
Business lending is not for every credit union, as the risk is higher and the expertise level required to underwrite and monitor business loans is much more difficult and costly to acquire. However, business lending is a growing trend at credit unions for two primary reasons: one, members are demanding it, and two, banks have largely turned their backs on the small business borrower with a preference toward the larger commercial loan packages.
There is a significant market for true small business lending, and some credit unions are well positioned to increase their footprint into that marketplace. Increased business lending will require considerable investment in expertise by credit unions and will bring greater regulatory scrutiny. For that reason, it will not be embraced by every credit union or even perhaps a majority of credit unions.
Business lending is, however, a trend to watch in the credit union arena and may well grow as other revenue sources are being crimped and becoming more marginalized. CUSOs could be the answer. I believe we are about to see an explosion of CUSO creation, largely driven by the need for expanded revenue and the realization that collaboration and cooperation is something credit unions do much better than banks.
CUJ: With the Durbin amendment a possibiity, what is your view on the possible loss of interchange income and how it will affect pricing?
Dollar: The loss of a significant portion of interchange revenue for credit unions is a big deal, potentially much bigger than the impact of the Reg E changes on credit union income, because most members who utilize overdraft privilege programs will elect to opt into the program over time. Overdraft revenue may take a short-term hit, but it should rebound within 12 to 18 months.
However, any significant interchange revenue loss will likely be permanent and will force some significant changes in how all financials price checking accounts. The possibility of increased fees on certain checking features will grow with the loss of significant interchange revenue, perhaps a small monthly fee for bill pay services or an increase in overdraft fees.
However, I would caution credit unions against too much overreaction to the loss of some of their interchange income through a knee-jerk approach of automatically moving to higher fees. The average credit union has 42% of their members who utilize (their) checking account product.
One of the best ways to make up for the loss of some interchange revenue on debit cards is to increase the number of members with a debit card, which means increasing the number of checking account users. Rather than mirroring the banking industry that is likely to react with higher fees on checking, there might be some considerable mileage that credit unions could gain by offering a more consumer-friendly checking account and using that product to dramatically grow our checking account penetration-thus making up for the loss in interchange revenue with increased volume of debit transactions.