Why changes from the Fed mean new opportunities for credit unions

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The Federal Reserve may have handed credit unions a golden opportunity to innovate with new deposit products and marketing efforts. The big question is how soon they’ll seize that opportunity.

The central bank recently tweaked its Regulation D by eliminating the provision that limited transfers or withdrawals from savings accounts to six per month.

This move has significantly blurred the lines between savings and checking accounts, potentially opening the door for credit unions to create new types of products. But it’s unlikely much development will happen now as institutions face a deluge of deposits and are focused on weathering the coronavirus.

“I think you will definitely see some marketing around it and some innovative product development,” said Steven Reider, president of the consulting firm Bancography. “We are a big industry with 11,000 banks and credit unions combined. You will see some innovative things, particularly tied into marketing with the coronavirus crisis.”

Previously, the Federal Reserve required financial institutions to set aside reserves for deposits held in transaction accounts. To ensure savings accounts weren’t used essentially as checking accounts, Regulation D limited an accountholder to no more than six transfers per month from a savings account. Savings accounts that went over that limit could be converted into a checking account or the consumer faced potential fees, experts said.

“Regulation D is one of the oldest regulations the Federal Reserve has,” said Carleton Goss, an attorney with Hunton Andrews Kurth. “The idea was if banks keep some of their deposits with the Federal Reserve, it was kind of like a rainy day fund. … [T]hey [also] did it because this was a way for the Federal Reserve to have liquidity to conduct monetary policies.”

But now the Fed has set the reserve limit to zero percent for transaction accounts, making the six-transfer cap basically pointless.

“The rationale for treating them differently for withdrawals went away,” said K. Thomas Ko, a partner at the law firm Stroock & Stroock & Lavan. “People just need access to their money.”

The move could encourage consumers to save more since they will be able to access their funds more freely, said Nick Maynard, a senior vice president at Commonwealth, which focuses on financial security for lower- and moderate-income Americans.

Over the years, the nonprofit has heard complaints from banks and credit unions about the six-transfer limit preventing more vulnerable populations from saving. These consumers may wish to put aside money in a savings account but grow concerned if they can’t easily access these funds.

Most Americans build their savings with the intention of drawing those accounts down to pay for rent one month if something unexpected happens, or to buy school clothing for their children, Maynard said.

“There’s a ton of research where even $1 into a separate savings account changes your thinking,” Maynard said. “There is something about having a place to put it — if you have only a checking account — that doesn’t allow you to unlock that sense of accomplishment.”

However, the amendment to Regulation D also doesn’t require an institution to make any changes to its current checking and savings account offerings. That means credit unions could continue to limit members to six savings withdrawals per month for a variety of reasons. For instance, credit unions may be reluctant to make any drastic changes for fear of jeopardizing liquidity or may decide to keep the limit in place and collect fee income from those that go over it.

Management at the $2.9 billion-asset Truliant Federal Credit Union in Winston-Salem, N.C., is evaluating its options right now, said David D’Annunzio, chief financial officer. The overall impact from any changes should be relatively modest and member behavior shouldn’t change drastically, he predicted.

However, it will make the overall member experience better since consumers may have been confused by elements of the six-transfer limit, D’Annunzio said. For instance, a transfer from savings to checking via mobile banking counted toward the cap, but directly withdrawing funds from savings at the ATM did not.

“I could see how the requirement being lifted could lead to some creative changes in the way accounts are marketed and labeled, but we have no plans right now to make changes to our core products,” D’Annunzio said.

Credit unions could focus on promoting products along the lines of “unlimited money market checking” that give members higher interest rates — the usual draw of a savings account — with the flexibility of a checking account, Reider said. A product like that would need to have tiered rates so only accounts with higher balances would get a money market rate, he added.

There could also be some marketing around these changes tied to the coronavirus, such as telling members they can manage their finances more effectively during the crisis with unlimited withdrawals from a savings account.

But most credit unions will not implement widespread changes right now, experts said. For one, dealing with potential credit issues stemming from the pandemic will be a top priority for the foreseeable future.

Credit union loan delinquency rates should double in 2020 from a year earlier because of COVID-19, according to CUNA Mutual Group’s latest Credit Union Trends Report, which examines data from February, shortly before the pandemic broke wide across the country.

“The credit quality crunch will dominate everything,” Reider said. “Executives don’t have a lot of wherewithal to introduce complex products.”

Additionally, consumers tend to park their money at institutions during times of financial stress. That was seen during the last recession when credit unions were awash with liquidity but demand for loans dried up.

Credit unions can expect deposits to increase by 12% this year for a variety of reasons, including falling gas prices, a volatile stock market and relief checks issued by the government, according to CUNA Mutual. The industry’s loan-to-savings ratio fell to 81.9% in February, down from 83.7% a month earlier and 83.9% for the prior year, the company reported.

Given that deposits should flow into the system, credit unions have little motivation right now to launch products aimed at gathering funding.

“I think it’s fair to say that when we are getting into a liquidity cycle again that’s tight, that might foster some additional creativity with products that were previously against the rules, according to Reg D,” D’Annunzio said. “Now we are seeing a surge in liquidity.”

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Financial regulations Federal Reserve Deposits Checking Savings accounts Consumer banking