One View On How Checking Acct. Competition Is Likely To Play Out

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NEW YORK-Free checking with no requirements attached may be about to join the toaster giveaway in the Museum of Financial Services.

Hank Israel, director of payments and checking for Novantas LLC, a financial institution consultancy, told Credit Union Journal he believes the trend is toward the end of simply free checking.

"As much as 30% of checking accounts at commercial banks were underwater from a profit situation," he said. "I think we'll see 'free with...'-free checking with direct deposit, with a minimum number of monthly transactions on a debit card, with a minimum relationship balance, with a mortgage-although I wouldn't advise offering it free with a mortgage."

Although some financials have announced an end to their free checking programs, Israel believes as soon as several turn away from the product, it will re-emerge as a differentiator.

"In the Canadian market banks package their checking accounts in the same manner as cellphone plans, but I don't think the U.S. will ever go that far, because regional and community banks will differentiate themselves by offering free checking again."

Bye Bye, Overdraft Income
Overdraft income is "significant" at a number of credit unions, Israel noted, which makes Regulation E's requirement that consumers opt-in for overdraft protection a vital issue.

Novantas is anticipating commercial banks will lose as much as 32.5% of overdraft income in the aftermath of Reg E, depending on the opt-in percentage at a given institution.

"If we look at credit unions, their reliance on checking is less than banks. For those credit unions that are very aggressive with checking, their overdraft losses could be a lot higher. But credit unions can gain it back by offering the opportunity to opt in for overdraft."

Novantas has found when banks and CUs have a conversation with consumers about opting in for overdraft, roughly 70% do so.

With that said, he continued, "consumers are becoming a little more sensitive to overdraft fees and on their spending habits in general. Therefore, credit unions are in a good position because commercial banks are facing huge skepticism, he suggested "All the media and press has turned people off on commercial banks."

The challenge for credit unions is they lag their commercial counterparts on delivering new products to the market, Israel declared, and consumers are going online more often to manage their finances-which bypasses a key CU differentiator. "There are different needs at different credit unions, so they should recognize those needs rather than just build out services because other financial institutions are offering them."

Moreover, he advised CUs need to "get on board" with understanding they won't change the way consumers manage their finances. Having a fair price inside the brand they present is critical.

"Credit unions, as with banks, probably have most households being transactional accounts only and low-balance transactional accounts. They need to make sure they are engaged with their members and not just doing check cashing. Otherwise they will run into sustainability issues over time."

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