Rundown

• Arizona FCU loses 15,000 members because of newfee.
• Aimed at building primary loyalty, credit union contendsthe strategy is working.
• Critics say fee runs counter to credit unionethos.

Although there are more than 93 million credit union members,only 40 million use a credit union as their primary financialinstitution. So is there any way to convince the remaining 53million members to bank at a credit union for their day-to-dayfinancial needs?

The $1.2 billion Arizona Federal Credit Union in Phoenix saidit is the first financial services cooperative to try a new butcontroversial solution to this long-standing industry-wide dilemma:Require all of your members to pay a monthly membership fee.

Since the $3 a month membership dues requirement was announcedin last December, about 15,000 members closed their accounts, andsome of them expressed their anger over the new fee on Facebook.Other members sent letters, emails and made calls to the creditunion. Even though the membership decline was expected, the creditunion contends its new strategy is working.

However, industry experts said Arizona FCU's membership feecontradicts what credit unions are all about. Moreover, they alsodon't like the idea of charging a membership fee to people who havealready contributed capital to the credit union when they opened anaccount to become members.

So why did Arizona FCU decide to charge a new membership feewhen consumers, fed up with too many commercial bank fees, weremotivated in droves to join credit unions over the last twoyears?

“Our entire purpose in doing this is to increase the percentageof members to actively use the services of the credit union andcontribute to the cooperative,” said Steve Kelley, senior directorof marketing. “We think [it is] an application of one of the sevencooperatives principles, members' economic participation, [which]says members contribute to the capital of the organization, andthis is an opportunity for our members to do that, to invest in thecredit union and stand to reap the benefit of the returns that comefrom that investment.”

Arizona FCU contends its membership fee is one solution that isaddressing the credit union industry's longstanding challenge ofhow to increase profitable members.

“Our goal was that [members] would start using services thatbrought them at least $3 in value, or that they would go ahead andclose their membership so that in one way or another, the rest ofthe members weren't continuing to carry the load on their behalf,”he said. “So far, that is what we see happening.”

About 25% of the credit union's members are profitable. Thecredit union is financially sound, reporting a net income of $44million in 2012 and $45 million in 2011. It also has lifted its networth to assets ratio from 6.43% in 2011 to 9.73% in 2012,according to NCUA financial performance reports.

But Dennis Witherspoon, a bank and credit union executive for nearly 30years, said the membership fee is not consistent with thecredit union movement.

“What they are doing is treating this like a for-profitbusiness, and they are chasing out those members that are notprofitable,” said Witherspoon, an associate professor of finance atNorthwood University in Midland, Mich. “The credit union is sayingwe don't want that kind of [unprofitable] member anymore. We justwant members that we are going to make money off of. That goesagainst the grain of the credit union movement, which is to bethere for all members regardless of financial wealth.”

Credit union industry consultant Tom Glatt Jr. said themembership fee is an interesting but punitive attempt to changebehavior of members.

“Regardless, I can see how [the credit union] could argue thatit needs to do this to conform members to active relationships,”observed Glatt. “But the fact that they had so many members closetheir accounts is telling, and I also think it is not a creditunion friendly solution.”

He also questioned the wisdom of charging a fee for theprivilege of membership when members have already contributedcapital to open their accounts when they joined the creditunion.

“I don't particularly like the idea,” he said. “I understand whythey are doing it. I think they can find a better solution, in myopinion.”

Arizona FCU launched its $3 membership fee policy last August atone branch and rolled it out to another of its 14 locations everytwo weeks. When new members signed up at branches, they wereinformed about the cooperative business model, that in addition toreceiving lower priced products and services, members would receivefree identity theft protection and restoration services by openinga checking account with an issued-at-the-branch debit card.

New members were also told they could share in credit uniondividends at the end of the year based on their relationship withthe credit union and its net profitability at the end of the year.Arizona FCU distributed $3 million to 77,000 of its then 161,965members. Every member received a base dividend payment of $12.82,but the average dividend payment totaled $38. Some members receivedseveral hundred dollars.

Currently, the credit union said its membership stands at alittle over 152,000 but expects the membership losses to stabilize.It said it has been gaining 1,000 to 1,500 new members every month.Though the credit union insists the membership fee is not a revenueplay, it will generate $5.4 million annually at its currentmembership level.

Kelley said the new member acceptance rate of paying the $3membership fee is more than 80%, and less than 20% rejected joiningbecause of the fee.

“For folks who take time to do the math, when they take a lookat that and say who else that I'm doing business with is going topay me back when they have a surplus at the end of the year….[the$3 membership fee[ makes sense,” Kelley said.

But when Arizona FCU announced the new membership fee inDecember, it didn't make sense to some members, including memberswho joined the credit union 10 or 20 years ago.

“It's unfortunate, but you will be losing at least one customerthat you had for at least 20 years,” wrote member Christina Koehnon the credit union's Facebook page. “And in those 20 years, I'veonly earned interest income (like a bank), not 'excess income.'"The attraction of your institution was no fees. Now that will goaway.”

“Personally, the credit union responses in an attempt to justifythe fee have only made me more confident moving my money is the wayto go! It is sad as I have also been with AZFCU over 20 years!”member Jacque Torbyn Reeves wrote on Facebook.

Among the 12 members who posted comments on Facebook, 10 saidthey would close their accounts, one was neutral and only one waspositive.

“I love Arizona Federal credit union and I think that the 3.00 amonth membership fee is very reasonable for the personalizedservice they offer,” wrote member Valerie Long Kurth.

In January, when Arizona FCU announced that it had distributed$3 million in dividend payments, five members expressed thanks, but10 credit union members were not so appreciative.

“Here's $12 (dividend payment) but we're going to start chargingyou $3 a month which amounts to $36 a year, so really your membersare paying you,” wrote member Laure Altenes. “Too many choices outthere with credit unions and banks for that matter that as long asyou have direct deposit of at least $250 a month will not chargeyou. Bye Bye AZFCU!!!!”

AZFCU did not censor any Facebook posts and responded to severalof them explaining its rationale behind the fee.

Nevertheless, Witherspoon questioned whether the loss ofthousands of members and the negative public relations in thecredit union's marketplace would be worth it.

“Once you lose that favorite status with your members, once youlose that feel-good [status] about your credit union, it's hard toget that back,” Witherspoon said.