By Andrew Jensen
Alaska Journal of Commerce
With the financial reform bill in the books, credit unions are closely watching Washington, D.C., to figure out the impact of hundreds of new regulations.
Potential reductions in interchange income — fees charged on each debit or credit card transaction — and a new consumer protection agency are among the major issues figuring to impact credit unions.
Credit unions are also pushing Congress for the end to a business-lending cap in place since 1998 that limits loans to no more than 12.25 percent of total assets.
Industry advocates for credit unions assert that removing the lending cap — opposed by their traditional rivals in the banking sector — would free up billions of dollars in available capital to small businesses with the potential to create up to 100,000 jobs.
“Our solution costs taxpayers zero,” said Dan McCue, senior vice president for Alaska USA Federal Credit Union. “It’s not TARP money, it’s just moving a cap that’s controlled by regulators based on your experience of doing it right.”
One area where credit unions and community banks agree, however, is that they will be disproportionately impacted by a reform bill designed to prevent another epic financial collapse that sent the economy into a tailspin in fall 2008.
“We’ve been lumped in with everyone else for new regulations and new disclosures,” said Credit Union 1 CEO Leslie Ellis, “which is unfortunate because credit unions didn’t cause the problems.”
Robert Teachworth, CEO of Denali Alaskan Federal Credit Union, was more blunt.
“I’ve been in credit unions for 34 years,” Teachworth said, “and I don’t think I’ve ever seen Congressional legislation that will do more damage to credit unions and community banks.”
Compliance with new regulations will raise costs for credit unions, and therefore customers, Teachworth said. Denali Alaskan spent around $5 million in compliance costs in 2009.
Credit unions are not-for-profit institutions that are owned by their members, who receive shares of credit union income through dividends, lower interest rates on loans and higher interest rates on deposits. Because their income is returned to their members rather than individual stockholders, credit unions are also tax exempt.
Credit unions have a long history in the state and are a bigger player in Alaska than elsewhere, with some reports indicating as many as 70 percent of Alaskans belong to at least one credit union.
The financial reform bill tasks the Federal Reserve with defining an acceptable interchange fee, which can range from 1 percent to 2.5 percent or more, depending on the type of transaction.
The reduction in interchange fees was pushed for by major retailers, who told Congress they would pass the savings along to customers. Teachworth said Congress’ intervention reflects a lack of understanding about global interchange networks set up by companies like Visa, Mastercard and American Express.
“Apparently these Congressmen think it’s magic behind these things,” Teachworth said. “It really does cost money to build and maintain these networks. You have a Congressman actually telling industry how to price their products. The result is we’re going to have to raise fees on this end because it’s a loss, so it’s a tax on the consumer.”
Some compromise on interchange income has been discussed, with the reduction in allowed rates only applying to institutions with more than $10 billion in assets. The problem with this solution, Teachworth said, is that companies like Visa would need to create a two-tiered network to charge the different rates.
“They’re expecting the networks to completely retool to do this,” he said. “In reality, what will be happening is they’ll drop this rate and we’ll get stuck with it.”
The end result will be the opposite of its intention, he said.
“The impact will be on small banks that are going to be closed or merge, and the big ones get bigger,” Teachworth said.
McCue said small banks and credit unions got caught up in a battle between big merchants and big banks.
“Eighty percent of the (card transaction) volume flows through the big banks,” McCue said. “At the end of the day, smaller institutions trying to maintain a card program can only do that if they’re able to maintain some sort of interchange income along with other income relative to the interest they make if it’s a credit card or other fees.
“If it becomes a model that’s no longer viable, you get out of the business and then all you have left are big-bank (card) issuers. What happens to consumers in that case? They don’t have a choice.”
McCue does see a potential positive from the consumer protection agency if the intention behind it is realized.
“Having a centralized bureau, in theory — if it means better coordination of regulatory oversight and maybe reducing the number of things to deal with four or five different agencies — would be better,” he said. “One thing that was promised out of this was that we would see regulatory relief.”
Overall, executives from the three largest Alaska credit unions reported the state economy is stable, their deposits are growing and loan demand is flat or declining.
Ellis, who has been CEO of Credit Union 1 for 28 years, said she is seeing a “flight to safety” from consumers rattled by economic turmoil. CU1 has total assets of $711.5 million as of June 30, 2010.
“We continue to see increase in deposits and it has to do with a flight to safety because of the shakiness of the financial market as a whole,” Ellis said. “Credit unions, because we are local, there is a flight to us right now as opposed to doing business with national institutions. We are the people they trust.
“The stock market is uncertain now, so at this point, people would rather receive a lower rate of return to know that their money is safe. And in Alaska, there is the whole local issue. Credit unions have been around for 50 to 60 years. They are a known and trusted partner.”
Denali Alaskan has added seven branches since 2007 and now has 17 statewide. As of June 2010, it had $440.8 million in total assets.
“We’re doing real well,” Teachworth said. “We’re profitable for the year. The general state of the economy up here is pretty good.”
At Alaska USA, McCue said the credit union has seen a 3 percent growth in state membership to around 234,000 members, total deposits for Alaska are up 8 percent to $2.7 billion and loans in the state branches declined by about 5 percent year-over-year to $1.6 billion.
“Consumers are being more conservative,” McCue said. “That’s the main driver. They’re being more selective in their process, you can see that in that deposits are growing. They’re putting more away and being more conservative in their borrowing.”