There’s No Such Thing As A Free Lunch

An article in the Los Angeles Times provides a cautionary lesson for credit unions.


On March 2 the Los Angeles Times ran a front-page article about the surge in new accounts at credit unions. The article highlighted Bank Transfer Day as the spark for the surge, but the writer concluded the increase in accounts could be a continued trend. According to the article, the rise in bank fees is just beginning, especially for lower balance accounts, and the lower fees offered at most credit unions could strengthen the transfer movement. Although this is good news for credit unions, the topic highlights why they also should proceed with caution.

Credit unions are under pressure to earn account revenue given the regulatory reduction in some revenue sources. Credit unions can’t offer a free lunch forever. Deepening relationships – share of wallet – will help to reduce the need for higher fees, but it won’t eliminate the need. Credit unions can raise fees and still look good when compared with banks, but execution is critical. Simply dumping the news on members won’t work, so credit unions must consider long-range planning and answer the following questions:

  • What fees do we actually need to increase?
  • How do we roll out any new fees?
  • What fees can we raise that will hurt members the least?
  • How do we educate members on why some fees must increase?

On the other side of the balance sheet, data suggests consumers are on a borrowing binge; however, it’s a strange binge. Consumer credit rose by almost $18 billion in January versus expectations of a more normal $10 billion or less. The three-month average is also now $18 billion. From October 2010 to October 2011, consumer credit rose at an average of $5.3 billion per month. Out of the blue, it’s rising at $18 billion per month clip. Car loans explain a lot of it, but car sales have been steadily rising without any sudden burst. One real outlier has been a three-month explosion in student loan debt. (Note: Consumer credit is mostly made up of car loans, student loans, personal loans, and credit card debt. Real estate related borrowing is not included.)

But the numbers get weirder. With such a boom in borrowing you would expect a surge in credit card debt, but credit card debt actually fell by $2.9 billion in January. I have no explanation for this behavior, and it makes me wonder if something is amiss in the data. Normally a surge in consumer credit is a positive sign of confidence in the economy and the job/income outlook. This one feels different though.