While much of the attention to interest-on-checking accounts in the new year will be devoted to NOW accounts being offered by banks and savings and loan associations, federal credit unions quietly have been getting a head start on them.
In fact, there is already something of a boom in share drafts, the credit union's own form of interest on checking.
The term refers to a check-like payment order written on the account of a credit union member. Instead of interest payments, members receive dividends. cYet a share draft is the functional equivalent of a regular check or a negotiable order of withdrawal (NOW).
Share drafts were begun back in 1974. Two of the first credit unions to introduce them were those in Dearborn, Mich., home of Ford Motor Co., and Travis Air Force Base. Pilot programs soon were approved for a number of credit unions across the country. Commericial banks sued to stop credit unions from paying interest on checking accounts or share drafts, but the courts bucked the issue to Congress.
Since share drafts were authorized last May, the number of state and federal credit unions offering them has increased by a third to 1,700 (out of a total of 22,000), and outstanding balances have doubled to $2.1 billion.
ICU Services Corp., a subsidiary of the Credit Union National Association, a trade organization, projects 3,800 credit unions will have $3.1 billion in balances by the end of next year.
There are 164 credit unions in the metropolitan Washington area with 900,000 resident members and assets of $1.5 billion. Thirty-three of the largest of them already offer share drafts and three more have recieved approval to do so. tIn the case of Navy Federal, the biggest credit union of all, the Justice Department credit union and The Washington Post Employes credit union, share drafts have been around since 1976.
A conservative estimate of the amount of money in share-draft accounts in District credit unions by Credit Union Services is $27 million. The average balance is $856.
As for balances of accounts in suburban Maryland and Virginia, any correct tally is rendered difficult by the fact that two giants, the Navy and State departments, do not break out the balances of area residents from members living elsewhere in the country and abroad. abroad. The roughest guess, made by Navy FCU's director of education and information, John M. Henderson, is something in excess of $8 million for its local members. Tom Prevo, assistant general manager at the State Department, said close to 3,000 new accounts have been opened since September with an average balance of $1,100.
In a survey conducted by The Washington Post, credit unions were asked the same questions about share drafts as banks and savings and loan associations were asked about NOW accounts to facilitate comparison.
Credit unions almost universally charge a simple $5 membership fee and no other minimum initial deposit. Just one credit union of the 33 surveyed charges a monthly service fee -- Bolling Air Force Base with a $3 fee. That makes its break-even point -- the balance at which the account earns more interest than is paid out in service-charges -- $498. With this one exception, any interest earned on a share-draft account is a net gain for the customer.
None of the credit unions surveyed charged for checks or put a limit on the number of share drafts the account holder can write without charge. Truncation, or destruction of paper checks at the source, is required by federal regulation. There are some minor differences in the prices charged for new share drafts and services such as copies of checks and stop-payment orders.
Nearly half of the respondents said they plan to or already do offer share drafts packaged with other services. The most frequently mentioned were savings accounts and overdraft protection. The Justice and Naval Research Lab credit unions offer debit cards as well, and the Navy and Educational Systems Employees credit unions mentioned plans for automated teller machines.
Three credit unions indicated on their questionnaires that they pay lower rates of interest on lower balances. The International Brotherhood of Electrical Workers Local 26 credit union pays 4 1/2 percent on up to $100, 5 1/2 percent on up to $2,000 and 6 percent over $2,000. The Government Printing Office credit union pays 5 1/4 percent on up to $1,000, 6 1/4 percent on up to $10,000 and 7 percent on more than $10,000. The Internal Revenue Service credit union pays 5 1/2 percent to $100, 6 percent to $500, 6 1/2 percent to $1,500, 6 3/4 percent to $2,000 and 7 percent on more than that.
The most significant differences among credit unions and their competitors -- commercial banks and savings and loans -- are in nominal interest rates and bases of interest calculation. The lowest interest rate, 3 1/2 percent, comes at the Interior Department, whereas eight other credit unions pay twice as much or up to double the Interior rate. The average for all was 5.55 percent.
Compared with NOW accounts, 36 percent of Washington's credit unions pay less interest than the 5 1/4 percent offered by banks and S&Ls here, 13 percent pay the same, and 55 percent pay more than the competition. (The American Bankers Association has protested to federal regulators that credit unions should not be allowed to pay 7 percent when banks can pay only 5 1/4; the conflict has not yet been resolved.) However, that 55 percent is reduced to 36 percent when differences in interest-rate calculations are taken into account.
According to the National Association of Federal Credit Unions, its members compute interest in essentially two ways, although the plans have various names. Day of deposit to day of withdrawal, day-in/day-out, ending balance, actual balance and daily balance all correspond to the average daily balance used by many banks and S&Ls. Three quarters of the credit unions in the survey use this method.
Low balance, quarterly or the federal method are terms used to describe a system whereby funds paid in by the 10th of the month earn from the first of the month if they remain on deposit to the end of the dividend period. The average daily method assures the maximum interest possible, while the quarterly method can mean a much lower effective yield.
NAFCU reports that a number of credit unions are switching to the newer, simpler average daily method, which is more advantageous to the customer. In an effort to resolve the confusion without imposing a single method on them, the National Credit Union Adminstration -- the government regulator of credit unions -- has required a disclosure statement warning that the nominal interest rate may not be effective interest rate.
It also will force credit unions to tell their members that dividends are paid on the basis of earnings. This means that interest might not be guaranteed on accounts if the credit union were in bad shape financially.