Why Free Checking Has A Future

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WILMINGTON, N.C. — In the face of looming interchange cuts, credit unions should develop strategies to keep free checking, urged Bob Giltner.

"Credit unions need to keep free checking; it will carry the day and maintain other revenue sources besides interchange," said the consulting partner with Velocity Solutions. "But credit unions need to first know their numbers, understand the profitability of their products, and confirm the percentage of revenue being generated by debit."

If it is 15% of the net revenue the financial institution gets from checking, as indicated by a 2010 Fed study, Giltner said CUs should focus on the remaining 85% of checking income that is largely driven by debit—ATM and NSF fees, relationships per household, and balances. "Focus where the fish are biting. You can replace interchange if it goes away."

The recommendation runs counter to advice shared by Dennis Driscoll, former SVP at FIS, who says free checking is dead (see related story).

To keep free checking credit unions have to incent debit to increase usage, especially since 40% of debit cardholders are non-users and 30% are light users, according to Giltner. "A person swiping the debit card 20 or more times generates three times more revenue per account than someone swiping a card one to five times," said Giltner, sharing the example of banks in Australia that had to cope with a debit interchange cap in 2003. "They learned that it is smarter to keep free checking and continue to incent debit usage."

Meat For The Millennials

In addition, one of the biggest segments for credit unions is the millennials, Giltner said.

"We all know that people under 35 are the biggest swipers. But what's not often known is they are also one of the heaviest cash users, as shown by a BAI/Hitachi research. Work on ways to move more of their cash transactions to debit."

PIN Is More Profitable

A greater emphasis on PIN over signature will increase revenue, too, since a close look at total revenues per debit transaction shows PIN is more profitable. "Despite the Fed study that shows PIN generates 16 cents per transaction and signature 33 cents, since PIN transactions clear immediately and signature takes days to clear, PIN generates NSF charges 2% of the time compared with 1% for signature. Why would a credit union want to give away this revenue by getting rid of free checking and driving away members and debit swipes?"

Giltner added that he has spoken with a number of financial institutions that say if the Durbin amendment goes through, they will "not give up free checking and will substantially promote PIN because they can make up some of the lost revenue by shifting more debit users to PIN."

Moreover, said Giltner, "PIN has almost no fraud loss, while signature costs almost four cents a transaction due to fraud."

Account acquisition strategies should be in place, as well, to capitalize on those banks that are eliminating free checking.

"Now is the time to beef up account acquisition since the ducks are flying," Giltner said. "I know a number of financial institutions that are having banner years picking up checking accounts from banks like Chase and BofA."

Adding new checking members will give the credit union a big lift to counteract interchange looses, noted Giltner. "For every new checking account you add you are picking up about $170 in annual revenue."

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