What fee philosophy has your CU adopted?

Banks have made headlines by charging hefty fees for just about everything they do. And credit unions, by charging lower and fewer fees, are quick to point this out. Credit unions are not immune from having to charge some fees to discourage overuse of various services and to boost spreads in a low-interest-rate environment.

When, why, and how much to charge-if anything-are questions that can be fraught with peril for credit union chief executive officers (CEOs) walking the fine line between being member-friendly and going broke.

"Service has a price," declares Joanne Kersey, CEO of OSU Federal Credit Union, Corvallis, Ore. "We can't continue to yell and scream at the bankers about charging fees when we're in the same boat.

"Credit unions have long wanted to give away the store," she continues. "I came up through that philosophy where we did everything for our members, and it gets to weigh pretty heavily on the bottom line. This year is going to be tough for credit unions. I think our margins are going to be much slimmer."

Fees can be a useful tool and they can boost the bottom line without alienating valuable members. Kersey, who runs a university credit union, sees fees as a way of curbing abuse by some students who run up a lot of small transactions on minuscule accounts that cost the credit union more than they're worth.

"Because 90% of our membership is universityrelated, we have three automated teller machines [ATMs] on campus. Those are free to members. I have lots of students opening $5 membership accounts so they can use the ATMs for free. That costs the credit union.

"I'm looking at how I can counteract that. I'll be packaging services so that people with certain accounts or with so much in an account will get a number of free ATM transactions."

Similarly, Kersey is trying to cut down on the use of expensive tellers. "We have all kinds of electronic services and members still come into the office," she says. "So we're looking at packaging that. If you use all electronic services, you get certain benefits. If you want to use a teller, you need to have a certain combination of services, and you'll get a certain number of teller transactions.

"I don't think it's a terribly different philosophy than what a lot of other credit unions have. We're trying to provide service, access points, and convenience-which are all expensive. We have to somehow recoup those costs or we're not going to survive,

"I look back to when we were a small credit union. We didn't charge fees, and we didn't have checking accounts either. If you're a plain vanilla credit union, operate out of one office space, and are still relatively small, you might be able to do just fine without charging fees. But if you're full service and you're trying to provide convenience for your members as well, which typically means having branches and ATMs, then I don't see how you could not charge fees to survive."

Kersey charges fees for overdrafts, statement copies, money orders, and account research. Foreign ATM transaction fees are $1; inactive accounts are charged $2 a month, starting two months after notification. Minimum balance fees depend on the type of account. Checking accounts are charged $4 if they have less than a $100 minimum balance, for example.

Kersey says charging fees to people who overuse service is helping the overall bottom line. "I was just going over my budget recently, and I was kind of marveling at the dollars that fee income brings in. If we didn't have those fees, who would be paying for those services that those kind of abuses require? Fees recoup what it costs the credit union to provide services to members.

"This is something we have to continually apprise people of, including the board. We want to continue to give personal service, but sometimes the board sees that as doing things for free. I turn around and say, `Fine-how many more employees are you going to let me hire to cover that?' "They say expenses are too high, and yet we should provide these services to our members. Well, you can't have it both ways.

"We're not trying to scalp our members. We're trying to be able to serve our members and continue to be here for them."

One of the hottest areas of debate is whether to charge for ATM use. At Southwest Federal Credit Union in Albuquerque, N.M., CEO Jim Barksdale is taking an innovative approach: The credit union recently discontinued its ATM transaction fee, switching to an annual $9 fee, which is charged at 75 cents a month.

"We're going to make up our costs through our earnings," Barksdale says. "We've had pretty high earnings. Rather than just add to capital, I think we can take that money and pay for the service for our members. It was purely a business decision. We felt we could afford to pick up a lot of that cost." Barksdale is less willing than Kersey to boost the bottom line using fees. While he assesses some penalty fees, such as $20 for not-sufficient funds (up recently from $15), $20 for stop payments, and $20 for research, other fees are meant to cover only costs.

"We wouldn't charge fees just for the sake of charging fees," Barksdale says. "For instance, you'll never see us charge a member $2 to come inside the lobby and talk to a teller-even though it probably costs us $2.50 per transaction to do that.

"Our fees are about 0.08% of average assets, which is probably about 10 or 15 basis points less than the credit union average. One thing we're going to focus on in 1999 is advertising the free services members get at this credit union."

Barksdale says he and other CEOs can widen the spread elsewhere. "In the past, credit unions have responded much slower in dropping rates on the savings side compared with banks and other financial institutions. We're going to have to react a lot quicker on the asset/liability management side than we've been accustomed to. But I think we can still provide a value to the member. In general, we're still beating the banks by about 70 or 80 basis points on loan and deposit products."

John Milazzo, CEO of Campus Federal Credit Union in Baton Rouge, La., says competition drives his decisions about whether or not to charge fees, and the decisions differ in each circumstance.

"Members are sophisticated enough to realize they have many choices available to them," Milazzo says. "Our competition used to be the bank, but we're discovering it's really the credit union down the block.

"Part of our strategy is to be competitive and provide the best service without having to be the lowest-cost provider in the market. If we have to charge a little more to do that, we think it's a value our members will want.

"As we add more sophisticated services, we must also add staff with the skills to manage those services. If we don't have a salary and benefits structure to compete with a bank and a credit union down the street, we won't be able to provide those."

Milazzo says CEOs need to be careful with some fees-or the lack thereof. Fees can generate a perception that a service has worth. "If members pay nothing for a service, that service won't have much value to them. But if you associate a fee with it, people will attach value to it and use it despite the fee."

But that strategy goes only so far. Milazzo is staying away from teller fees in part because his market won't accept them. Fees for online banking are hard to justify in an electronic environment where so many services are free, and debit card fees defeat the purpose of using the card, he says.

"We encourage those delivery mechanisms that are selfservice. We realize there's a more economical way of delivering cash than at the teller line or the drive-up window. ATMs have been very well-received in our marketplace, and we encourage that.

"We set minimum cash withdrawal limits. Obviously, if we put a $5 minimum withdrawal amount as opposed to $10 or $20, we're going to get more $5 withdrawals. So that's one way of controlling use.

"The main thing is that credit unions need to know what their costs are. If you don't know what it costs you to deliver a service to a member at the end point, then you have no idea when you set a fee for that service whether you're covering your costs or not.

"Unfortunately, many credit unions will go into this blindly, where they price a service off of what another institution's prices are, which could have a totally different cost structure. What's good for one credit union might not be good for another."

Copyright Credit Union National Association, Inc. Feb 1999
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