Credit unions everywhere are looking for new sources of income. The challenges: light loan volume, nonexistent investment rates, and fee income as scarce as a conservative Democrat.
Part of the problem is consumers, who’ve shown an affinity to move among financial institutions on a whim.
In fact, the Bank of America debit fee fiasco is a prime example of how not to handle this. From a general perspective, Bank of America was simply reacting to a change in its own economic situation.
James Collins is Credit Union Magazine’s humor columnist.
With its interchange income cut dramatically due to an amendment in the financial reform law, the bank’s board of directors attended a planning session in Australia and, over $1,000 per plate caviar, thought they could simply make up for the interchange income loss using a new fee on debit cards.
It’s mathematically simple, but psychologically disastrous.
Consumers reacted swiftly. Account closings shot up 20%, with many consumers going to credit unions and community banks that promised “low” or “no” fees.
I won’t get into whether or not Bank of America really needed the fee income to put gold fixtures in its executive washroom, but all financial institutions have fees.
Unfortunately for Bank of America, it violated several fee “commandments” for financial institutions, including:
1. Thou shalt fee things that members do, not what they don't do. Overdraft an account? A fee is acceptable. Stop payment? Ditto. Fee somebody who hasn't touched his money for a long time? Nope. Members need the cause and effect.
2. Thou shalt give thy members a get-out-of-jail-free card. Members must have at least the illusion of choice. Lose a debit card? Provide a free new one if the member is willing to wait 10 days for shipping. Charge $15 if the member can’t wait.
3. Thou shalt remember that 20% of your members pay for the other 80%. Don't fee the 20%. Give them waivers. Economics 101 still rules.
4. Thy fees must be explainable. Sometimes fees make sense, even when members don’t agree with them. But if you can’t explain how a fee is computed, why it’s sometimes waived, or why you need it in the first place, look out.
5. Thou shalt not charge for something that was free--at least not without offering a way to avoid the new fee.
6. Thou shalt blame the government whenever possible. Whether you’re a Democrat, Republican, conservative, or deceased, you can blame the government for anything—and everything. A $5 per month charge for a statement fee due to “the 40 cent postal increase” just might fly.
7. Thou shalt remember that math is not your members' strong suit. Never explain the economics of a fee decision. Members won't believe you anyway.
8. Thou shalt bundle. Your products don’t fit the McDonald’s dollar menu model. Offering too many options leads to consumer paralysis. Take some good features, bundle them together, and charge a low, basic price.
9. Thou shalt prepare to back up faster than a French tank. Implementing fees is kind of like managing a dozen teenagers. You never know which ones will work. When fees produce the "Bank of America effect," swallow your pride, refund the fee, and get on with life.
10. Thou shalt remember that in the end it’s about maintaining your credit union’s financial strength, not increasing profit. Additional fees must have a purpose—offsetting lost revenue due to regulatory changes, decreasing other fees, or lowering rates. Gold fixtures in the washroom should not be on the list.
Fee equity is a very hot topic today. The problem is that consumers—used to having free checking, free debit cards, and free coffee—don’t understand the economics of these products. Attempts to educate them through mandatory fees are doomed to failure.
To consumers, “free” is a very powerful word.