I can’t stay silent anymore on this issue and I know it’s going to ruffle a lot of feathers. So I’m going to approach it from a brand perspective. Brand is after all, your reputation. What you’re known for. And right now Credit Unions are getting a ton of unwanted press from the People magazine of the news world – USA Today.
Last week it was interest rates on “pay day loan” alternatives. This week it’s courtesy pay.
On Tuesday I was speaking at the CU Association of New York’s annual meeting. My topic, “2009 Reasons to Question Everything.” I took a chronological look at CU press in the past 8 months. At best we look like we’re struggling under the weight of a corporate stabilization – at worse we look like greedy bankers hiding behind this statement:
“…courtesy overdraft is provided because, “If we didn’t, (consumers) would go somewhere else and get it.”
That quote is directly from this latest USA Today coverage. But on Tuesday when I showed the previous week’s coverage an audience member rose their hand and basically said the same thing. So rather than losing it I took a deep breath and turned that comment back to the audience. I asked them how they felt about this statement –
“If we didn’t provide payday lending and courtesy pay, our members would go somewhere else and get it.”
There was a great debate that ensued. It was a debate of values. And it came down to this – are you okay losing revenue to a banker/competitor by doing what’s best for the member? Some argue that gouging them less (400% instead of 600%) was best for the member. Others said they didn’t want any part of enabling that kind of dangerous behavior – they were still in the business of helping members live within their means. Then it shifted back to the year of “chasing ROA” and having no choice. Others sheepishly admitted to being addicted – or dependent – on the revenue at this point and it would be really hard to replace it.
As you head into your strategic planning sessions this year – I think it’s time to review your values. If you’ve framed the word “integrity” on the wall and still allowed yourself to subscribe to the “courtesy pay” without advertising so we don’t have to comply with Truth In Lending, you might want to rethink that word.
I know that sounds harsh – but these are harsh times. You cannot temporarily inject your bottom line with bad profits and expect it won’t impact your reputation and the reputation of all credit unions.
Remember, we were founded to promote thrift and to provide loans for provident and productive purposes only.
The 2020 Vision of Marketing 
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August 7, 2009 at 5:27 am
Credit Union Warrior
I share your passion, but we must be careful not to paint everything with the same brush. Not all “pay day” loans are created equal. Many credit unions have “pay day alternative” loans that truly are good deals for members. (As an aside, I’m yet to see a courtesy pay plan that doesn’t stink of price gouging and encouraged irresponsibility).
The thing that scares me the most is what if these credit unions that have implemented questionable revenue strategies like you describe are still struggling to make ends meet? What happens when the golden goose gets taken away?
Truth is that in our blind quest for growth at any cost, many credit unions simply expanded too rapidly. Too many services, too many high cost incentives to attract new business, and too many speculative or over-priced branches were introduced without a reasonable and sustainable business model to support them. The huge number of credit unions that believed in the slow and steady wins the race mentality have been much better suited to weather the current economic storm.
August 7, 2009 at 5:29 am
Mark Curran
Thanks for saying what needed to be said Denise. In the wise words of everyone’s mother, “If all of your friends jumped off a bridge, would you do it too?”
August 7, 2009 at 5:30 am
Janine
Maybe I look at it too simplistically. Courtesy Pay can be a good service for credit union members if it is an occasional oops and a check is covered. If courtesy pay is accessed more frequently, tie it to financial counseling, working with the member to help him or her avoid being in the situation to begin with. If counseling doesn’t work – are there consequences? Interventions? I am amazed when I hear about folks with higher income levels who just don’t want to be bothered with balancing their account and don’t mind the fees.
August 7, 2009 at 5:44 am
Denise Wymore
WOW! Thanks for all your comments and so quickly – my hands are still shaking from writing the original post.
@Mark Curran – My mom actually did say this to us – and it needed to be said. Teenagers, like some credit unions tend to be fast followers – without thinking about the consequences. If it’s good enough for someone I admire, it’s good enough for me. Even if that “thing” is taking drugs!
@CU Warrior – I think some vendor created the turnkey pay day loan product and sold a ton of this stink to credit unions. We have always done pay day loans – but they looked like signature loans. Someone needed a little cash to get them through the week – we’d type up – literally – a one pay note. We’d charge 18%. And if they paid on time, it was a couple of bucks.
Were these expensive to distribute? Oh, hell yes. If all you’re looking at is employee cost and materials. But what we failed to measure and still don’t acknowledge is the loyalty economics of these moments. These members became fiercely loyal. As time went on they became those profitable members we lived for. They came to us for all their service – thought of us as their PFI and didn’t rate shop us.
This world is way too into instant gratification and measuring profits 30 days at a time rather than long term.
@Janine – I agree that the concept of courtesy pay was exactly for you and I. In fact I screwed up on my checking account last year and had courtesy pay kick in. I was very embarrassed and happy to pay the fee. Although my credit union didn’t charge that much. I made a deposit immediately and that was that. The courtesy pay programs that allow you to see your invisible limit at an ATM machine however – enable bad behavior IMHO.
August 7, 2009 at 5:52 am
Dan Veasey
You’re right Denise, there are lot’s of CU’s who have developed a dependency on this ‘service’. It’s a shame that in some cases they’ve provided the means for members to get dependent on it too. I think the best way to break an addiction is cold turkey. There’s pain and heartache but the rewards of doing things the right way are worth it in the long run.
Janine, I really like the idea of providing counseling to abusers. But wouldn’t that negate the profits from it?
August 7, 2009 at 6:19 am
Mike Bartoo
Dan – I would tend to agree that you’re correct in saying that “cold turkey” is the way to go. Having said that, I think Warrior is incredibly accurate when he addresses how many CUs could literally not survive without the income generated from these programs.
Denise, I remember those days of small personal LOCs to get someone through the weekend…when they got to where they couldn’t pay it off with the next paycheck, you sat down with them and worked through it. Anything to help them avoid “dependency” – I guess much like alcohol, etc.
August 7, 2009 at 6:36 am
Denise Wymore
@Mike Bartoo – exactly.
Maybe a 12-step program needs to be developed – beginning with credit union CFOs……
Here’s another option to pay day lending and gouging members with fees. Cut costs! I have a problem with a CEO driving a fancy company car and getting a swanky health club membership paid for in this economy and charging 400% interest on a bounced check for someone that may have just been laid off.
Anyone else see a problem with that?
August 7, 2009 at 6:59 am
Jeff Hardin
Terrific post, Denise. Keep ’em coming.
The sad truth is – being real and living … really LIVING … the cooperative philosophy somehow isn’t viewed as sexy by some anymore. Maybe stories like the USA Today coverage, and posts like yours will get people to start asking a few difficult questions.
August 7, 2009 at 7:33 am
Ryan
Both courtesy pay and the pay day alternatives seem to have followed the same pattern:
1. CU’s see members having to pay not only overdraft fees (or exorbitant payday lending fees in the case of payday loans), but also fees from the merchant, so they are getting double-charged.
2. In our effort to look out for the best interests of our members, we offer courtesy pay, which maintains the overdraft fee, but still honors the charge, preventing our members from getting charged a second time from the merchant. Many times these charges are mortgage/rent/credit card payments, and if the members bounce a check with one of them, we’ve all seen what happens: exorbitant late fees and penalties are imposed.
3. Some credit unions (and members) will find ways to take advantage of the system, and will spoil it for the majority of honest, responsible members who have a sporadic, but legitimate need for these services.
Will there always be people who take advantage and abuse any service we offer? Of course. Members get into all sorts of trouble with credit cards, but does that mean that because of this minority of “abusers,” we should shut down issuing credit cards? I would hope not.
I don’t understand when credit unions say we need to offer a product or service because the member can just go down the road and get it from somewhere else. If we all used that justification, then all credit unions would have entered into the subprime market and would find ourselves in a MUCH bigger mess than some credit unions are already in. I’m extremely glad the majority of us didn’t do this.
Justifying fees by saying you depend on it to make your bottom line is a farce. Fees should be implemented only as a deterrent to undesired behavior–never as a boost to ROI. As mentioned above, it’s a shame that many financial institutions have lost this line of thought.
Great article. Hopefully it will open the eyes of some credit unions who have decided that fees, instead of developing solid, positive member relationships, are the best way to make a profit.
August 7, 2009 at 7:50 am
Denise Wymore
@Ryan
WOW! What a great point about Sub-Prime lending. There is a threshold that most credit union execs were not willing to cross.
Why didn’t they get into that business? Way too much risk and truly not in the best interest of the member – even if you were in California. So why wouldn’t you apply that thinking across the board?
I wish I’d thought of that argument on Tuesday. Would’ve made for an even more interesting debate.
August 7, 2009 at 8:13 am
Ryan Kendrick
Thanks for the reply. Can you clarify something so I can make sure we’re not talking past each other? Are you saying that courtesy pay as a whole isn’t in the best interest of the member, or are you saying that there are some credit unions who stretch the meaning of courtesy pay? I’m assuming the latter, based on your follow-up comments. Courtesy pay CAN be in the best interest of our members (as it was in your best interest when you overdrafted last year), as long as it’s not abused.
I think the key is developing a solid program that helps mitigate abuse, and shut down chronic abusers of the product, who demonstrate that they truly don’t understand the concept of what courtesy pay is all about. I would argue that courtesy pay is used responsibly by over 90% of our members–let’s not villainize the entire product–let’s work on helping those who can’t use it responsibly.
August 7, 2009 at 9:02 am
Denise Wymore
@Ryan,
I agree that the entire product is not evil – but rather the application of the product. One of the problems I have with courtesy pay, however, is that it has pretty much completely replaced the $500 overdraft line of credit. This would’ve been in the best interest for me in my situation. I overdrafted less than $100 and was charge $25.00.
In the old days I would’ve advanced $100 at about 18% interest rate. Paying it off immediately, like I did , would have resulted in me paying $.05 in interest.
August 7, 2009 at 10:05 am
Janine
@Dan – Profit is all how we look at it. If a credit union can help a member learn how to handle their finances better and become a “good borrower” there can be long term profits.
August 7, 2009 at 10:50 am
Dan Veasey
Good answer Janine! Investing in the development of smart, savvy, and aware members will always yield a good long term return.
I guess my issue with courtesy pay is the motivation behind it. To me it seems that most CU’s implement it to increase revenues for the CU. All the stuff about helping the member comes up after fact to help justify it. I do believe it can be a worthwhile service if used wisely. Ryan, your CU seems to do a good job of encouraging members to do that.
The Overdraft Line of Credit is a far more member friendly service. Our CU still offers them with limits ranging from $300-$1000. These can still be abused just as easily as courtesy pay, but the abuse doesn’t cost the member anywhere near as much money.
August 7, 2009 at 7:03 pm
Jim Jerving
The reason payday lending is so popular is that it has a good business model and filled a need that many credit unions ignored for a long time. Courtesy pay fills a need similar to payday lending. No matter how much education we provide, some members will always opt for payday lending and courtesy pay. Research shows that payday lending customers are found among credit union members and staff. We can’t change human nature; we can only provide options. After we’ve given the options, it’s really up to members to make their own choices about how they want to manage their money.
August 10, 2009 at 6:25 am
Denise Wymore
@Dan – and that’s the point I was trying to make but you said it perfectly:
“The Overdraft Line of Credit is a far more member friendly service. Our CU still offers them with limits ranging from $300-$1000. These can still be abused just as easily as courtesy pay, but the abuse doesn’t cost the member anywhere near as much money.”
@Jim – I totally agree, but see Dan’s comment above. Kind of hard to argue.
August 10, 2009 at 8:18 am
Matt Hand
It’d be good to point out that some credit unions have implimented a way to break the “Pay Day Lending Cycle” if a member would fall into its’ grips. Here’s how: a portion of each Pay Day loan is deposited into a share/savings account. If the cycle persists, then the savings grows with fresh deposits. Eventually, the savings will be enough to cover their need without having to take out another Pay Day Loan. This would effectively break the cycle and hopefully allow the member enough breathing room to smooth out their financial situation.
I think it’s important for credit unions to provide better alternatives to the worst type of emergency lending a person would need. What we should make clear is that no credit union is targetting areas of high poverty and lower economic activity like the traditional Pay Day Lending and Car Note Lending industry. I know of neighborhoods in DC and even Arlington/Alexandria VA that the only retail locations in a several block radius are liquor stores, cell phone stores, pawn shops and Pay Day Lenders.
Also, one of the recent USA Today articles employed bad data in order to make their point. See the Credit Unions Rising post about that here: http://bit.ly/tw5Kz
August 10, 2009 at 8:37 am
Denise Wymore
@Matt Hand – thanks so much for your comment. You description of credit unions breaking the cycle of bad debt is inspiring. Truly people helping people.
Last week I asked an audience of CU folks “How many of you still do share secured loans.” About 1/4 of the hands went up. Then I asked “How many of you don’t know what I’m talking about?” Sheepishly another 1/4 of the audience raised their hands.
The USA Today article was clearly written by someone who hates credit unions – unfortunately the readership is so huge, the damage is done.
I hope credit unions will look for ways to help members live within their means again – like the example you gave.
Rather than just bragging on price – we don’t charge 700%! Let’s focus on the real problem – we’re in a recession – a great recession – and it’s going to be easier than ever to get in a bad cycle of debt.
Sure, there’s lots of money to be made and we’re chasing ROA, but to what end? The pay day lending cycle is like a big oozing sore – for the issuers and the borrowers – if you don’t stop picking at the scab, it’ll never heal. Okay that was gross – but you get the idea.
August 10, 2009 at 11:07 am
Carla Day
While I am a supporter in the concept of Courtesy Pay programs, I am with you that some credit unions are not using them in the best interest of their members. Over the years, it seems that there are becoming two distinct groups of credit unions that I like to call “credit union” credit unions and “bank” credit unions. The former really do look out for the best interest of their members and their members are their mission. The later use the big bad banks as an excuse to promote programs that hurt members. They are doing it and want a piece of that pie. For example, if we don’t have courtesy pay and charge $32 each time, we can’t offer online banking, bill payer, mobile banking, etc.
I believe that Courtesy Pay is a good service for members when the members aren’t gorged for the service. In an ideal situation, members could choose a LOC and also have Courtesy Pay for a back up. Credit unions should not extent the Courtesy Pay to debit card purchases or ATM withdrawals. If that is seen strictly as a service to members, then offer the LOC!
I have heard such hypocrisy from some CU leaders. They won’t allow checking to overdraw from a HELOC because a person’s home shouldn’t be used for groceries, but they will gouge that same member $32 for those same groceries.
I hope that the regulations will be in the interest of the consumer and allow for Courtesy Pay in some form. And, if it is restricted too much, the outcome will be financial difficulty for some CUs, but is that a bad thing? Would those members be better serviced by a more member centric CU?
August 12, 2009 at 8:54 am
CU_Ninja
“Over the years, it seems that there are becoming two distinct groups of credit unions that I like to call “credit union” credit unions and “bank” credit unions.”
Couldn’t agree more Carla! It’s the “bank” CUs that are giving the industry a bad name.
From my perspective there is a fight for the soul of the movement going on between “bank-lite” CUs and us true believers.
For those who are up for a good fight, I would invite you to join me and many others over at http://www.creditunionsrising.com in great discussions like this one.
Thanks Denise for the excellent post, you are a true leader in our movement!
August 13, 2009 at 3:56 am
Denise Wymore
Thanks Carla and CU_Ninja for chiming in. This is such an important issue and a turning point for the credit union brand. I think it needs to be said!
August 13, 2009 at 5:32 am
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