CUs Not as Tolerant of Dormant Accounts as in the Past
o There's no surge in the shutdown of ?dormant accounts but it has become ?higher priority.
o Expenses related to inactive accounts are regularly evaluated.
o Members who join through indirect lending are still among the least likely to stay long-term.
In some credit union circles, it remains a taboo subject: making the decision to sever relationships with those members who have dormant, low-fund accounts that have become too expensive for the credit union to maintain.
As the industry continues to search for operational efficiencies, purging inactive accounts, a measure typically done at the end of the year, is still not an urgent matter for most even in the middle of a strapped economy.
Credit unions have had earning pressures for four years running, CUNA Chief Economist Bill Hampel said. They're looking at different strategies to become efficient and one of those strategies could be dropping dormant accounts. There's no clear-cut pattern of mass dumping, but that could change.
Still, "it would surprise me if there is a surge now," Hampel said. However, he added that in the last five years, credit unions have become less likely to keep dormant accounts as long as they have in the past.
The NCUA is very clear about how much latitude credit unions have when closing dormant accounts. Under its regulations, in tandem with truth in savings and accuracy in advertising disclosures, a federal credit union can determine the types of fees or charges affecting the opening, maintaining and closing of a share draft or share certificate account. Under the truth in savings regulation, a federal credit union must disclose to members fees imposed on dormant or inactive accounts.
Under NCUA's FCU bylaws, a federal credit union may terminate a membership if the member's share balance falls below the value of a par value share and the member does not increase the balance within a specified time period. Although the time period is left to the federal credit union's discretion, "it cannot be zero and should be reasonable," the NCUA has said.
Meanwhile, expenses related to inactive members coupled with low deposit rates could slow membership growth for the remainder of the year.
The August Credit Union Trends Report from CUNA Mutual Group showed membership at an estimated 92.8 million at the end of June, the latest period tracked. CUNA reported strong membership gains in June at 296,000 versus an average of 97,000 for the previous five months. The growth, however, is fairly consistent at 1.1%, according to CUNA Mutual Chief Economist Dave Colby. The industry is still on track to have 93 million members by the end of the year.
Until then, CUs may face limited funds for marketing and, as a result, will continue to actively manage membership rolls, including expenses related to inactive members, Colby said.
"When these trends are combined with very low deposit rates [as a result of] no rapid growth due to rate shoppers joining credit unions, we anticipate membership gains in the second half of 2010 to be muted at best."
The nation's largest CUs will continue to dominate membership growth, Colby said, adding the industry should expect a large share of CUs to post membership declines in their mid-year Call Report data.
Colby said purging inactive accounts from a credit union's membership roster is linked to the usual budget cycle.
"In spring, you're all about growth and then you start looking at where to get the most bang for the buck," he said. "I don't think purging is a bad thing. Most credit unions I've talked to say, 'We're looking at expenses, we're looking at accounts and we want to give members more time to do more relationships with the credit union.'"
Hypothetically, it may cost $1.17 to generate each statement for a dormant account with $5, Colby explained. Credit unions tend to mine these relationships to see which ones will bear fruit. "They will try to get the true value of the relationship or if that doesn't work, send [the member's] money back," he said.
The CUNA CFO Council once reported that many credit unions charge a monthly fee between $3 to $6 after one or two years of dormancy. Some will make exceptions for high balance accounts, individual retirement accounts and accounts held by young members.
Hampel said dormant accounts tend to spring from indirect lending. The stories of credit unions bringing in new members through enticingly low rates at a car dealer are legendary. The danger is such members are among the least likely to establish long-term relationships with a credit union. Hampel said the conversion rate for these members is 10%, a high number, in his opinion. However, despite efforts to cement alliances, some credit unions end up purging a dormant account when the auto loan is paid off.
Hampel said that if he had to pinpoint a pickup in the purging of inactive accounts, it would be 2008 and 2009 when credit union net income was 0%. With a seven basis point earning over that two-year period, the industry was looking in every corner and under every rug for ways to economize. Colby agreed with Hampel, saying basis points were being chipped away by assessments.
"Over the last couple of years, credit unions took a closer look at dormant accounts and it became more of a credit union priority," he said.
Even a member who has a mere $5 fermenting in a two-year-old account may still represent an opportunity. Colby pointed out that such members may have loans elsewhere, opening up the door for credit unions to bring them into the fold.