These are three things I think have hurt us, kept us from growing and are going to get us in trouble. These are my opinions, please feel free to disagree. I love a good debate.
Myth #1: The checking account (share draft) is the PFI indicator:
It was, and in many shops still is, our goal to be every member’s primary financial institution (PFI). Does getting a member to commit to a checking account mean you are more likely to be the chosen one? Why? Well, you should get direct deposit of their paycheck and when they needed a car loan, or VISA or home loan, they will think of your credit union first. That was what I was told anyway.
According to an article in the Financial Brand published December 2, 2020:
Being someone’s primary financial institution continues to be important and beneficial to a bank or credit union. For all except the largest banks, however, remaining a consumer’s primary provider has already become more difficult and it will likely become even harder.
One reason is that the idea of centralizing much or all of one’s financial business is eroding, as Millennials and Generation Z come to dominate the industry’s consumer base.
The definition of a primary financial institution is not clearly defined and never has been in my opinion and yet we still do surveys asking members “Do you consider your credit union to be your primary financial institution?” Answering yes doesn’t really tell me anything. The article goes on to say:
Novantas found that the leading criterion among Baby Boomers and Millennials was “Where I receive my direct deposit” (64% and 53% respectively), but among Gen Zers it was the institution where they withdraw cash (37%). When Novantas looked at the draws that each generation looked for, the leading one for Gen Z was ‘Lots of ATMs in my area.’”
It begs the question, “So what?” What do we do with this information? How does it help us innovate? How is this a measure of success? Our household has three checking accounts at three different credit unions. Many members do. It’s too easy to shop for the best deal on loans, credit cards, investments to be tied to one place.
Myth #2: By adopting the FICO score you can lower your risk and increase your profits.
When I started in credit unions the lending decisions were based on the three C’s: character, capacity and collateral. We had a fourth “c”, the credit report but there was no grade attached to it. Then along comes the Fair Isaac Corporation – FICO. Today FICO scores are used in more than 90% of the credit decisions made in the US.
Credit unions originally priced loans by category. The second largest credit union in the United States, State Employees Credit Union still does, with secured loans (auto, home) having lower rates and risk of loss than unsecured. But the credit scoring system now gave them a tool to price the loans based on risk, not product type. Sounds pretty smart, right? The big mistake they made, in my opinion, was assigning grades to the different levels. A, B, C, D…just like in school. No one wants to be a D student. You cannot deny that psychologically this had an impact on credit union lending practices. They became addicted to A paper. The more A’s they got the lower the delinquency ratio. Win/win, except for the consumer. Profits did not increase, loan yields plummeted and more and more credit unions had to supplement that income with non-interest income (see myth #3)
According to an article published in the Washington Law Review in 2014, ”The Scored Society: Due Process for Automated Predictions,” co-authors Danielle Citron and Frank Pasquale list three major flaws in the current credit-scoring system:
- Disparate impacts: The algorithms systematize biases that have been measured externally and are known to impact disadvantaged groups such as racial minorities and women. Because the algorithms are proprietary, they cannot be tested for built-in human bias.
- Arbitrary: Research shows that there is substantial variation in scoring based on audits. Responsible financial behavior can be penalized.
- Opacity: Credit score technology is not transparent – so consumers are unable to know why their credit scores are affected.
I have tried to crack the code on my FICO score for years using Credit Karma and I can vouch for the fact that it makes no sense. My score dropped 11 points in one month because I paid a credit card off (did not close it). Why should I get penalized for good behavior?
That’s what makes QCash so incredible, we do not use FICO to decision. We go old school and take into consideration the member’s relationship with the credit union. Not only does this give more access to more members but it can also help members to build good credit.
Myth #3: Members love courtesy pay
Courtesy pay was perhaps the most baffling of all the products that credit unions widely and quickly adopted in my 40 years. The marketing was brilliant. Instead of returning a member’s check and set them up for more fees and embarrassment, let’s cover that check as a “courtesy” but still charge them the NSF fee. Even more confusing was the fact that most credit unions paid consultants to come in and explain it and then paid them to implement it.
Immediately I saw the flaw in the system. It is a “loan” at a very high interest rate but because of the way it is structured it was not classified as such. Brilliant.
So many credit unions would tell me “Oh, our members just LOVE courtesy pay.” Really? Do you have any NPS data that says I will recommend my credit union because they charged me $70.00 to cover two checks totaling $100.00. Boy do I just love courtesy pay. It saved me the embarrassment of a bounced check and more fees from the merchant!
What’s the True Cost of Courtesy Pay?
I found this on a credit union website highlighting the lower cost of their courtesy pay product:
The Average Overdraft Fee
The average cost of courtesy pay is $35. That means every time you overdraw your account, whether at a store, an ATM, or during an online transaction, you get charged a quick $35. This might not sound like such a terrible fee at first, but considering most overdrafts are the result of simple oversight, you could make several transactions before realizing you’ve racked up overdraft fees far and away more expensive than the purchase amounts you made.
Based on data from the Consumer Financial Protection Bureau, most overdrafts happen with transactions that are $24 or less. That’s a $40 soda and candy bar at the convenience store, a $38 gallon of milk, or an extra $35 at the gas pump.
How about we make sure our members have access to proper overdraft protection? The most obvious would be an automatic (and free) transfer for any available savings account. Second would be access to an overdraft line of credit that they could pay back over time. A reminder of the credit union mission: not for profit, not for charity, but for service. Amen.