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

The $1.2 billion Arizona Federal Credit Union in Phoenix said it is the first financial services cooperative to try a new but controversial 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 announced in last December, about 15,000 members closed their accounts, and some of them expressed their anger over the new fee on Facebook. Other members sent letters, emails and made calls to the credit union. Even though the membership decline out was expected, the credit union contends its new strategy is working.

However, industry experts said Arizona FCU’s membership fee contradicts what credit unions are all about. Moreover, they also don’t like the idea of charging a membership fee to people who have already contributed capital to the credit union when they opened an account to become members.

So why did Arizona FCU decide to charge a new membership fee when consumers, fed up with too many commercial bank fees, were motivated in droves to join credit unions over the last two years?

“Our entire purpose in doing this is to increase the percentage of members to actively use the services of the credit union and contribute to the cooperative,” said Steve Kelley, senior director of marketing. “We think [it is] an application of one of the seven cooperatives principles, members’ economic participation, [which] says members contribute to the capital of the organization, and this is an opportunity for our members to do that, to invest in the credit union and stand to reap the benefit of the returns that come from that investment.”

Arizona FCU contends its membership fee is one solution that is addressing the credit union industry’s longstanding challenge of how to increase profitable members.

“Our goal was that [members] would start using services that brought them at least $3 in value, or that they would go ahead and close their membership so that in one way or another, the rest of the 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. The credit union is financially sound, reporting a net income of $44 million in 2012 and $45 million in 2011. It also has lifted its net worth 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 30 years, said the membership fee is not consistent with the credit union movement.

“What they are doing is treating this like a for-profit business, and they are chasing out those members that are not profitable,” said Witherspoon, an associate professor of finance at Northwood University in Midland, Mich. “The credit union is saying we don’t want that kind of [unprofitable] member anymore. We just want members that we are going to make money off of. That goes against the grain of the credit union movement, which is to be there for all members regardless of financial wealth.”

Credit union industry consultant Tom Glatt Jr. said the membership fee is an interesting but punitive attempt to change behavior of members.

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

He also questioned the wisdom of charging a fee for the privilege of membership when members have already contributed capital to open their accounts when they joined the credit union.

“I don’t particularly like the idea,” he said. “I understand why they are doing it. I think they can find a better solution, in my opinion.”

Arizona FCU launched its $3 membership fee policy last August at one branch and rolled it out to another of its 14 locations every two weeks. When new members signed up at branches, they were informed about the cooperative business model, that in addition to receiving lower priced products and services, members would receive free identity theft protection and restoration services by opening a checking account with an issued-at-the-branch debit card.

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

Currently, the credit union said its membership stands at a little 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 revenue play, it will generate $5.4 million annually at its current membership level.

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

“For folks who take time to do the math, when they take a look at that and say who else that I’m doing business with is going to pay 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 in December, it didn’t make sense to some members, including members who joined the credit union 10 or 20 years ago.

“It’s unfortunate, but you will be losing at least one customer that you had for at least 20 years,” wrote member Christina Koehn on the credit union’s Facebook page. “And in those 20 years, I’ve only earned interest income (like a bank), not ‘excess income.’” The attraction of your institution was no fees. Now that will go away.”

“Personally, the credit union responses in an attempt to justify the fee have only made me more confident moving my money is the way to 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 said they would close their accounts, one was neutral and only one was positive.

“I love Arizona Federal credit union and I think that the 3.00 a month membership fee is very reasonable for the personalized service 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, but 10 credit union members were not so appreciative.

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

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

Nevertheless, Witherspoon questioned whether the loss of thousands of members and the negative public relations in the credit union’s marketplace would be worth it.

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

Instant Insights /

Arizona FCU Membership Fee Breaks New Ground

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