A Cork credit union is to become the first in Ireland to introduce charges on accepting member deposits, as the sector continues to grapple with the costs of holding soaring savings and muted demand for lending.
First South, a credit union covering the south of the city with 34,000 members, is to introduce a new €1 charge on transactions from February 1st, 2021. The charge will apply to all transactions, including deposits and withdrawals, and will mean that each time a member puts money into their savings account, or withdraws from it, they will be charged.
The fees won’t apply to loan repayments, while members under the age of 19, and students under the age of 26, will also be exempt from the charges. Those over the age of 65 will have to pay the charge.
Members of the credit union, which has branches in Ballyphehane, Kinsale, South Mall and Dillon’s Cross, will have the option from this date of either paying €1 each time they make a deposit into their savings or a withdrawal, or opening a current account.
This account carries a €4 monthly fee, or €48 a year, and covers unlimited in-person and electronic transactions, as well as the credit union’s current account offering, which comes with a debit card.
Explaining the decision, George Cantwell, chief executive of First South Credit Union, said it is a direct result of changes over the past five years in the financial landscape, which has impacted on the credit union's business model.
“The world has changed very significantly,” Mr Cantwell said, pointing to the difficulty in getting a return on investments, coupled with negative rates.
He said the “vast majority” of banks now charge negative rates on short-term deposits to the credit union sector, with rates ranging from about -0.65 per cent to -1.0 per cent. This means savings of €10,000 will cost the credit union up to €100 to place on deposit with a bank.
“Savings are very,very expensive for credit unions,” Mr Cantwell said.
For this reason, many credit unions have imposed limits on the amount of savings they will accept. One of the lowest is at Malahide Credit Union in north Dublin, which will only accept €10,000, while Progressive Credit Union, also in north Dublin, recently imposed a limit of €15,000. First South Credit Union does not have a limit for existing customers, but new customers are restricted to deposits of up to €30,000.
While no other credit union has yet imposed charges as First South intends to do, Paul Bailey, head of communications with the Irish League of Credit Unions, said that while the credit union may be the first to do so, "my sense is they won't be the only ones".
“What we’re seeing is credit unions are going to have to look at some way of recovering their costs to provide services to members,” he said.
Imposing charges on accepting savings is a significant change in approach from credit unions, who would typically have encouraged people saving for a rainy day. However, it comes at a time of a perfect storm for the sector, with reduced income due to a falling demand for loans – demand fell by about 80 per cent in the sector during the first lockdown – coupled with poor investment returns. At the same time, the sector is being penalised for holding soaring savings.
“Members who are purely saving need to contribute more,” Mr Cantwell said, adding that while credit unions offer electronic services, they also have a strong branch presence. “It’s important that members themselves contribute to the running of their organisations; it’s the personal touch that differentiates the credit union from another organisation.”
While the new transactions fees will somewhat help pay for the current challenges, Mr Cantwell said “they won’t cover 20 per cent of our costs”, adding that the main source of income for the credit union sector remains lending.
Credit unions are also obliged to place €10 of every €100 saved into a reserve fund under Central Bank regulations, which is "certainly is a challenge for credit unions" Mr Cantwell said. Mr Bailey said the ILCU would like to see this reserve decreased from 10 per cent to 8 per cent in recognition of the challenges facing credit unions.