Fee or Free

It’s a delicate balancing act as CUs try to generate income without annoying members.

July 1, 2012

Remember Bank Transfer Day? It all started because big banks announced new fees for debit card use and other services. Consumers revolted, and banks soon backed off.

Credit unions benefited from the bankers’ misstep, garnering hundreds of thousands of new members along with a net increase of 740,000 checking accounts during that period. One message was constant: Credit unions are the smarter choice for low or no fee accounts. Some credit unions went so far as to promise “fee-free forever” on certain products.

If noninterest income had been removed from the equation for the past decade, “credit unions’ return-on-assets (ROA) would have been negative by a substantial margin,” explains Mike Schenk, CUNA’s vice president of economics and statistics.Fees on members’ deposit accounts and loans contribute to credit unions’ noninterest income. In 1991, noninterest income accounted for 7% of credit unions’ total income. That nearly doubled to 13% by 2001 and nearly doubled again to 24% by 2011—its highest level ever.

Noninterest income includes fees on deposit accounts and loans, interchange income, gains on sales from mortgages, and other revenues—and it’s vital to offset market forces that put pressure on ROA, Schenk points out.

Consumers have become more accustomed to “free” and more averse to “fee.” They’re more likely to shop around, which is a good thing for credit unions, which generally have fewer and lower fees,” Schenk says. Credit unions also appeal to consumers with lower loan rates, member-friendly policies, and democratic control.

Schenk notes that many credit unions are striving to reduce back-office redundancies and work cooperatively to reduce operating costs, all of which eases pressure on the bottom line.

But reducing expenses can only do so much. That’s why more credit unions are exploring pricing strategies to serve members’ financial needs, strengthen member relationships, and maintain a healthy bottom line.

‘Whack a fee’

One credit union that helps members save on fees while simultaneously increasing fee income is Montgomery County Employees Federal Credit Union (MC EFCU), Germantown, Md., $87 million in assets.


Increasing member transactions is one strategy to avoid fees but earn income.

Promising members “fee-free forever” can make it challenging to generate income during a tough earnings environment.

Board focus: Understand the competition and members’ tolerance for fees as you develop pricing strategies.

On its website (, the credit union recently advised members to “whack a fee” by moving their business to the credit union from banks, where fees keep popping up. The credit union also increased its fee income by 50% over five years—from $1.4 million in 2007 to $2.12 million in 2011—moving its bottom line from the red to the black.

Boosting fee income played a critical role in shifting from an operating loss of $709,238 in 2009 to an operating gain of $417,134 in 2011, says Jim Norris, president/CEO.

Paradoxically, MC EFCU’s first step toward restoring the bottom line was eliminating two fees that annually generated $80,000: fees on shared-branch and foreign-ATM transactions.

“The more transactions members conduct, the more profitable those members are going to be,” says Norris, who joined MC EFCU in 2010. “We did away with a couple of fees to generate those transactions.”

Creating more transactions generated more revenue from the credit union’s largest source of fee income: a nonsufficient funds (NSF) fee of $30 for overdrafts and an overdraft line of credit program that carries an 11% interest rate.

The same principle was applied to credit cards in early 2012 when a new campaign offered 0% interest and no fees for 12 months. After a year, the interest rate rose to 8.9%, but still with no fees. The three-month campaign increased the credit card portfolio 25%, from $6 million to $7.5 million. The credit union’s offer saved members $240,000 in fees and interest, based on a 15% interest rate, Norris says. MC EFCU gave up its income from the fees and interest in exchange for building credit card balances.

 “We know from our research that our members have very good credit relationships, but those relationships happen to be elsewhere,” Norris says. “We wanted them to be here, and credit cards are a relationship account.” 

In addition, the credit union has:

► Refined lending products;
► Added text and mobile banking;
 Introduced remote deposit capture (RDC);
 Provided “me-to-me” transfers so members can move funds to accounts at other financial institutions; and
 Added person-to-person transfers.

The credit union soon will launch a new “Member Value” program, with the tagline “Do More, Get More.” The program links members’ balances in qualifying accounts to additional free services. Norris also expects to add fees linked to products and services that generate “added value” for members, such as insurance or investment products.

NEXT: Problems down the road?


Problems down the road?

Credit unions often make “fee-free forever” promises to draw in members from other institutions, and many did so last fall amid the swirl of Bank Transfer Day activity. Doing so could create problems down the road, however, especially in a tough earnings environment.

“The huge billboards and advertisements that credit unions are displaying against fees will make it challenging to go out and generate new fee revenue at a later date,” says Chad Watkins, manager, market intelligence division at Informa Research Services, Calabasas, Calif.—a CUNA Strategic Services alliance provider

Three fees account for the lion’s share of financial institutions’ fee income: checking account fees, foreign ATM interchange fees, and overdraft fees, Watkins says. Those fees generate the most revenue because they’re linked to the transactions that occur most frequently.

Watkins recommends researching competitors’ fees for each service. This can show credit unions that there might be room to increase fees and still offer a better deal than banks.

“The first thing I’d look at is your overdraft fees, because that’s a penalty fee charged when members make a mistake,” Watkins says. If banks are charging $30 and your credit union is charging $20, it might be reasonable to increase the fee to $22, Watkins suggests.

Next, test your members’ fee sensitivity, he says. This can help you determine which fees are tolerable in a specific market. Then make incremental changes that condition your members to accept fees for selected services.

Watkins says credit unions also must examine their checking account structures and operating costs to determine whether or not the free model works for their bottom lines. Rather than adding fees to all accounts, Watkins suggests creating a structure that requires members to change their behaviors or deepen their relationships to earn free checking.


Going back to basics can help credit unions refine fee strategies, according to Pete Hilger, president of Allied Solutions. He recommends focusing on three product areas:

1. Checking accounts. Designing a comprehensive program helps credit unions continue to offer free checking by reducing expenses and boosting fee income. If credit unions decide to move to fee-based checking, a well-designed program can ease the transition. Either approach should focus on offering checking programs with high value for members.

2. Loans. Generating more loans boosts fee revenue. Interactive, digital marketing systems can tell members about credit unions’ competitive advantages to increase lending while boosting member satisfaction.

3. Consumer-driven products. Guaranteed asset protection and mechanical breakdown protection shield members from unexpected costs while generating income. Members perceive these products as adding financial value to their lives, rather than as “fees.” A comprehensive training program is essential to empower employees to offer products to members.

Free checking might be dependent on signing up for e-statements, using direct deposit, taking out loans, or using some combination of those products and services. 

“You’re creating behavior that’s going to help your credit union,” Watkins says. Education is essential to help members understand how to move from “fee” to “free.”

More transactions

First Abilene Federal Credit Union, $59 million in assets, received national attention in April 2012 when the consumer website NerdWallet listed its checking account on “Top Free Checking Accounts at Credit Unions.” Following the recognition, First Abilene Federal’s fee income increased 18%, from $370,502 in 2010 to $437,595 in 2011.

A new checking account structure accounted for the difference, explains Faye A. Smith, president/CEO. New checking options encourage members to perform more transactions at First Abilene Federal, which leads to more fees for overdrafts and more loans.

Loans account for 68% of income at First Abilene Federal, while investment income makes up 1%. “The remaining 31% needs to come from miscellaneous income, which is our debit and ATM fees. But that income has decreased 14% because of reduced interchange income,” Smith says. “So we have to continually look to see where we can make up those shortages.”

First Abilene Federal now offers free checking, free debit transactions, two free “courtesy pay” refunds annually and free access to 28,000 ATMs nationwide through the CO-OP Network. Members age 50 or older can get “Vantage Checking” that adds two free boxes of checks annually. A “Vantage Plus” version offers higher rewards to members who maintain a $500 minimum checking balance.

First Abilene Federal’s courtesy pay and line-of-credit programs charge $25 for each overdraft covered, which compares to local banks’ $40 NSF fees. The line of credit has a typical limit of $500.

Financial counselors contact people who overuse courtesy pay to emphasize the savings of using the line-of-credit for a single large overdraft, which generates one $25 fee, as compared with using courtesy pay for multiple small overdrafts at $25 each. Smith says some members say they now use their line of credit instead of higher-cost payday lenders.

Smith is seeking new options for fee income, such as promoting “prepaid debit” instead of “gift cards” to reach a new market. The cards carry a $5 fee, with $3.50 going to the issuer and $1.50 retained by First Abilene Federal. Smith is also switching credit card issuers and making other changes to pare costs, which will allow the credit union to make its credit card program more competitive.

“It’s about knowing your competitors and your members, and being fair to your members and your credit union,” Smith says.

NEXT: Relationship pricing


Relationship pricing

UW Credit Union, $1.54 billion in assets, Madison, Wis., was willing to give up fee income to persuade members to use more services when it moved to relationship pricing for its checking accounts in 2002, according to Chad LaFlash, research and development director.

“Serving a younger population, we could see that giving away checking services without strong loyalty or efficiency wouldn’t work in the long run,” LaFlash says. “And we didn’t want to mislead our members into a ‘free’ checking option that relied on fees to be successful.”

The credit union’s answer was a three-tier relationship checking product that mirrors members’ life stages:

1. The “access” tier is for young adults and students with simple financial needs.
2. The “value” tier is for members entering the workforce or starting a family.
3. The “premium” tier is for homeowners or members with more complex financial needs.

Each tier requires a minimum number of qualifying services to be free from monthly fees. 

Members in the “access” tier, for example, must use four services, including checking and savings accounts, to have a free account. The credit union emphasizes self-service options, which help the credit union retain 60% of its members six years after they enter the university as freshmen.

Members in the higher tiers can “earn” higher interest rates on deposits and lower rates on loans.

“All of the account tiers are better than the traditional free checking model, since we don’t charge for any basic transactions like foreign ATM withdrawals or bill payments,” LaFlash explains.

The program has helped lower operating expenses on accounts owned by members with limited lending or deposit needs, LaFlash says. More than 80% of checking accountholders receive e-statements.


Allied Solutions

CUNA’s loan and deposit pricing training resources.

Informa Research Services—a CUNA Strategic Services alliance provider.

State National Companies

UW Credit Union now has the highest number of PFI members of any financial institution in Dane County, while fee income has declined steadily. During the past five years, “our checking accounts have grown nearly 60% while fee income per member has dropped 10%,” LaFlash says. “Our ROA and equity positions remain strong because we’re growing loan and deposit portfolios, despite current economic conditions and compressed margins.”

Members are encouraged to use a line of credit program or automatic transfers from savings to avoid the standard $30 NSF fee, which the credit union will charge only once per day and will eliminate altogether if the negative balance is less than $10. LaFlash notes that UW Credit Union’s overall NSF fees per account are lower than 96% of all credit unions nationally, according to independent research.

The credit union typically links fees to subsets of members who use specific services, such as wire transfers or safe deposit boxes. It also charges fees to modify “risky behaviors,” such as late payments.

Image protection

Informa’s Watkins notes that credit unions that want to restructure their fee income programs, including fees tied to the checking account, must find ways to do it that protect their “fantastic image” while generating revenue to support member services.

That makes it essential to avoid a patchwork approach in favor of a strategy that delivers clear messages to members, Watkins says. “Get them in the door, deepen the relationship, and drive the behaviors.”