In Your Best Interest: An ALM First Podcast

Embracing a Fee-Free Future With Amplify Credit Union

• ALM First

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Get ready to witness banking revolutionized as Jackie and Sonia from Amplify Credit Union unveil their bold stride toward a fee-free future. Discover the power of a financial institution that tosses out the fee playbook, carving a path for others to follow and shifting the landscape for generations to come. They share the remarkable story of Amplify's evolution from an IBM employee-founded organization to a technological titan with a $1.4 billion portfolio. Delving into the heart of the credit union's decision, we celebrate the familial legacy of financial wisdom passed down in Jackie's family and Sonia's profound expertise in asset-liability management.

This conversation breaks ground on how Amplify Credit Union's fee-free model elevates member engagement, nurtures financial stability, and fortifies average deposit balances. We scrutinize the unexpected economic patterns that emerged, with reduced overdrafts and charge-offs, and how this strategy not only aids members but also fortifies the institution's financial health. Embracing Sonia's acumen in financial strategies, we peer into the future with anticipation and edify the importance of partnership and innovation in the banking sector. Be part of this ambitious journey toward a fee-free banking realm that redefines consumer relationships and sows seeds for a thriving, equitable financial ecosystem.

Speaker 1:

Jackie and Sonja. Welcome to the show. Hi Mike, thanks for having us here so before we dig in, for those folks not familiar with Amplify Credit Union, share a little bit about the credit union with us.

Speaker 2:

Absolutely, mike. I'd love to share a little bit more about Amplify. Amplify was started by a few IBM employees back in 1967. Although we're no longer directly associated formally with IBM, the high-tech legacy membership started us on a path to becoming an innovative, technology-first credit union, and we are still that today. Today, we are a $1.4 billion credit union and consider ourselves in four lines of business real estate lending, commercial lending, loan servicing all funded by fee-free deposit gathering. We have five branches, including a virtual branch, which is actually our fastest growing branch of them all.

Speaker 2:

I started at Amplify in early 2021. Actually, for those of you who live in Texas, you might remember a snowpocalypse it was just a few days after that. Still, we were still reeling from the crazy times of COVID. I joined Amplify from outside the credit union space. With a background that started out in public accounting and SEC reporting. I moved into controllership in several different industries, including mortgage banking, and that led me to Amplify. About a year after I started, on February 2, 2022, amplify Credit Union became the first full-service financial institution in the country to eliminate all banking fees for every depositor, regardless of balance or behavior. I think it was around that time that the CFPB launched an initiative to save Americans billions in junk fees, but the actual process for Amplify started about two years before that. Luckily, amplify has had the benefit of Sonia's expertise for all of those years. So, sonia, why don't you share a little bit about your background?

Speaker 3:

Hi, my name is Sonia Altamirano. I started banking back in 2008. I'm not that old, but just started a long time ago. I started my career in in Mexico, working for the largest bank in Mexico. In their international division, this bank happened to acquired a small bank in Texas in South Texas to be exact, mcallen, texas and I was transferred there and worked for the subsidiary of this Mexican bank. I work for a small community bank Well, not that small, it was $3 billion at the time. Then, after being there for about six, seven years, I was transferred to Austin, were relocated because of my husband's job. So I found this great opportunity in Amplify to continue my career and I entered the credit union space. My expertise is ALM management, budgeting and financial reporting awesome.

Speaker 1:

Well, that's great. How about a little something about yourselves, maybe beyond just a credit union, that maybe a lot of people don't know?

Speaker 2:

I have an exciting update I would love to share with this group.

Speaker 1:

Awesome.

Speaker 2:

We have four kids right now. They range in age from 18 to 22. And I'm very happy to report to this group that I have just hit a 50% ratio of CPA candidates.

Speaker 3:

We have two of our kids who are going into the industry.

Speaker 2:

So I'm very happy to say that we are doing all we can for the world of accounting in our household.

Speaker 1:

Following in mom's footsteps. Yes, it is fantastic and I know that career will do great for them, I'm still hoping to win one more over by the way, I'll let you know where all that lands out.

Speaker 2:

I've got one who's leaning in.

Speaker 1:

That's great. How about you, sonia?

Speaker 3:

Well, my kids are young now, but hopefully they follow the same path as yours. I mean, you've got this. I followed my dad's path. He's an accountant, so I majored in accounting and finance, so I hope my kids just follow the same path, as we all did.

Speaker 1:

Well, this is exciting. I've got people who are passionate about finance and accounting, and so let's dig into the meat. You know you mentioned that you're the first credit union to go fee-free, so why did the credit union decide to roll out fee free banking?

Speaker 2:

Absolutely. Yeah, it's not just accounting that we are passionate about At Amplify. We believe that if we focus on products that live up to the mission of supporting the financial health of our members, then we will drive growth and success for Amplify, its members and its employees. We believe junk fees, especially overdraft fees, profit from financial difficulties rather than support financial health, so we do not want to focus on those revenue streams. You know, in a lot of ways, as we were listening in on some of the M&A discussion here at the conference today, I think this is very in line with some of the things we hear in that area. For instance, you should only look at a merger if there is value to the member, and I think that's how we look at products as well. We should only be doing things that drive value for our members.

Speaker 3:

To give you a little bit of perspective. An average member institution was paying about $96 a year on bank fees and they were only earning about $25 on interest. If you compare us from an Austin area institution, even with the highest paying institution, they were earning about $65. So I mean that doesn't sound like a good bang for your buck.

Speaker 2:

We've also done some research before we started on how this affects generations. We found that millennials in Gen Z pay an average of $192 to $228 per year in bank fees. At best, they're earning less than $25 in interest from the most generous Austin area financial institution. On average, it's actually less than $10. At the same time, gen X and Baby Booners pay $4 to $6 per year in bank fees and earn an average of $20 to $50 in interest in the Austin area. The truth is that, even though these are coming out ahead of their high yield accounts, they're still just receiving a nominal amount of interest, which their earnings on the backs of those likely to be their kids and grandkids, who are counting every dollar. Some of this data was gathered before the interest rate hikes a year or two ago, but we still believe the disparity amongst the generations is probably only intensified under the backdrop of the rising interest rates and high inflation backdrop of the rising interest rates and high inflation.

Speaker 1:

So I have a two-part question for you, then. What was the decision-making process like to make this decision? I guess that would be part A and then part B, which is going to be the bigger one, which is what I hear. A lot of institutions that have now started to do this. They've eliminated the fees, but they didn't have a way to make up that income, so obviously that's going to be, I think, something that everyone is interested in, but let's start with the decision-making process absolutely.

Speaker 2:

Since Sonya was here during the decision-making process in the early stages, I have a feeling she can tell that story better than I can. Sonya, how did we make that decision?

Speaker 3:

So this goes a couple years ago when Amplify had a research firm take a segment of her membership and a segment of the industry at large, focusing on the Austin area. So what we learned was two things. So what are the money? What are the main drivers for the members to bank with us? One is security and we had that at the time and we still have it and the other one was either rewards or fees. We decided that we did not want to try to play the rewards game, because the minute somebody has a quarter point better than you, they will leave you. So we felt that wasn't sustainable and, as the story goes, kendall was at the room with the researchers.

Speaker 3:

Kendall Garrison is our CEO. He was in the room with the researchers and they started talking about how people hate fees. They just don't like fees, and it's not that we as members can't afford those fees, it's just that we think it's just unfair to pay them. Um, so they kept on talking and talking and kendall just said why don't we stop charging fees to the members? And everybody, of course, was laughing and you're crazy, of course. But then the teammates, they started to think more about more and more about that and we started digging and learning more about how will that work for us, and since then we couldn't get it out of our heads.

Speaker 2:

So I think that story has gone down and amplifies folklore and probably a few years from now there'll be more fun parts of that story that people will keep adding in. But that's exactly what I heard happened as well. You know, each institution has an individual set of circumstances that must be evaluated, that are part of their strategy. But at Amplify we achieved fee-free strategy through offsetting it with interchange income and increasing deposits and stickiness of deposits. So that's the second part of the question I think you are asking.

Speaker 1:

Absolutely.

Speaker 2:

Yeah, we also had built a strong base of other revenue streams before we kicked off fee-free, and I think that's a really important part of the discussion.

Speaker 2:

In February 2022, the month we went live with fee-free after two years of hard work, setting up the systems and doing all of the background work, we had around $120 million in loan production, driving origination income, loan sale income and mortgage servicing income. So you know, those are the same four lines of business that we had talked about earlier. So, to be clear, we understand that Amplify started in a different place than many are in. Our research indicated that institutions of our size typically have about 25 percent of their income sources coming from fees, and for us it was only 4 percent. At that time we went live, so it was an easier decision for us than it would be for other institutions that rely more on those income streams. However, it is still really important to remember that steps in the right direction can be meaningful instead of choosing to double down on this type of revenue. So we are really pleased that we were able to go fully fee-free and drive that conversation across the industry.

Speaker 1:

Yeah, and that makes a whole lot of sense. So you have the researcher come in, you make the decision. It's not a big part of your income stream anyways. You're obviously a loan production machine, so to speak, and so when you started down the path then what goals did the credit union set when the initiative was launched?

Speaker 2:

You know, goals can be really hard to set and in a quickly changing economic environment, comparing results to those goals can become even more challenging and even more unproductive. Think about the rising interest rates, covid, the collapse of SBB and other regional banks. So you know, yes, we did set goals, but did we really track to those? For very long I would say no, but I can tell you that a little bit about the results and how they've been so far. In the first year, Amplify accelerated its growth in new checkings and savings accounts by about 5% to 8% is what we believe. It can be a little bit hard to estimate, but that's our best estimate. We consider that to be a win.

Speaker 2:

With rising inflation and interest rates across the industry, we defined the baseline in that, by the way, as the average for the three prior periods, 2019, 2020 and 2021. I mean, finding baseline years and baseline information in these volatile times can be challenging. I can also add that the average balance for our members we attracted after eliminating fees is double what we projected and more than 40% greater than the average balance of our deposit portfolio at large. That's been really encouraging. This might not be eye-popping, we know that, but we knew that this would be a slow burn and that it takes time to create a strong sticky deposit base for your core deposits, and I think that's important to remember. It can also be hard to strip this information out, given other factors that have been going on in the economy and to our members' balances. So the farther we get away from the fee-free date, the harder it has been to gather these types of statistics out of the core data.

Speaker 1:

So then the question that comes to mind is if such a small percentage of your income was from these I'm guessing punitive fees, what's the? And the word gets out to the greater Austin area that you now have this fee-free model, how did that drive deposits, or what was the incentive for people to bring deposits to you? And I guess the follow-up to that it's a many-part question is were you bringing in big depositors or small depositors?

Speaker 2:

As I said, I think we found that the average balance for the members that we've attracted after eliminating fees is about double what we projected and more than 40% greater than the average balance of our deposit portfolio.

Speaker 2:

But to more directly answer your question, I think we found this as a multifaceted marketing tool. For some people they are really excited to avoid fees and sometimes that's some of the younger generations, but also some of our more established members are so insulted by fees that they are really driven to be a part of our organization, at least at some level in their checking accounts and savings accounts, because when they do send that occasional wire they love that they didn't get charged a fee and they want to be a part of that. So I think it can definitely come from many different types. It can be beneficial for many different types of members. Also, I think that we've all learned over the past few years the importance of sticky deposits. I know we're all looking at our non-maturity share studies and we want to make sure that those numbers stay firm and I think fee-free is a big part of that.

Speaker 1:

You know you touched on something that's a personal hot button of mine and it is that incoming wire fee. I'm bringing you money and you're going to fee me and it's so frustrating You're not going to.

Speaker 3:

but you really are. We are not you clearly are not, we are not.

Speaker 1:

So you know, with new products or structures sometimes adjustments are needed along the way. Were there any lessons learned, surprises or tweaks that the credit union had to make on the fly?

Speaker 2:

You know, one thing that comes to mind when I hear that question is that when we first went live, we found that members I mean new members, other financial institutions, others in general didn't believe us. They thought there was a but at the end of the sentence, and for us there is no but, and so I know that our teams were very intentional about how they talked about fee-free, often saying it as clearly as possible and I'm using quotes that it's impossible to incur a fee of any kind in any depository account at Amplify. I've heard our CXO, stacey Armijo, say that we've had great success with getting this message across in settings like the Austin Chamber Lunches or via our community banking program. We've launched that program actually in the middle of this year and it's an exciting new program. We have an Amplify that directly reaches out to the community. I think that that's been. Another lesson learned is just getting the message across so that people really understand what we're doing over here at Amplify takes a little bit of intention.

Speaker 2:

Also, I think it's important to remember like many things, you can't time the market, so I'll just add a little bit on that here Rising rates, inflation, the collapse of several banks, the effects that we've seen on liquidity and interest rate risk. None of that could be predicted. In hindsight. We know we peaked with monthly loan production in April of 2022 at around $200 million per month, but we had no way to know that when we were originally starting to set up fee-free. After that we had after April 2022, we did have to pull back on production to help tightly manage liquidity and this has limited our earnings capabilities in 2023. But we know that the markets will settle themselves out and in fact we feel very confident about 2024 and beyond for fee-free, supporting the wealth of our members in this current environment where consumers may be using up their COVID stimulus and COVID savings and be more interested in saving on fees as their balances as they deal with consumer credit, and I think overall we're all very excited to have fee-free in our toolkit as we look to 2024 and beyond.

Speaker 1:

Yeah, it certainly seems like a competitive advantage for you.

Speaker 2:

Yeah, thank you.

Speaker 3:

Well, and of course we have to remember that every institution is different and I mean I'm not sure this is the right fit for everyone, but you have to be willing to to to look at your numbers and see if maybe you can rely on other income sources and this, if this can work for you or for your institution you know.

Speaker 2:

I'd also love to share one other thing that I think speaks to how glad we are to have fee-free in our toolkit. We're actually so excited about the strategy we are about to double down. I'm excited to say, and proud to share with this group, that in 2024, amplify is going to be going live with fee-free for treasury management services. That product is currently under development. We're building out our team. We've already hired the lead for that team and we're excited to bring that conversation to the world of commercial deposits.

Speaker 1:

Well, it'll be fun to follow up with you and hear how that's going a year from now.

Speaker 2:

I'm very excited about it.

Speaker 1:

So what advice would you give to other institutions considering a fee-free banking model? Any words of wisdom to share?

Speaker 3:

Okay. One advice that we can give, and that we think it's very important, is to be willing to rethink your historical assumptions. When we did our analysis, it revealed that what our industry calls low balance accounts those accounts actually generate twice as much interchange income in a rising rate environment. I think we have all continued to better understand the value of sticky deposits. One year after implementation of fee-free, we found less utilization of overdrafts than before than a couple years before.

Speaker 3:

Those who use it very frequently, like, let's say, more than 20 times a year, they have increased just slightly, just by less than 2%, and this was almost entirely offset by the interchange income. To our surprise, after doing a lot of research and a lot of looking at data, our charge-offs went down. If we go back I don't know maybe four or five years during the six first months out of after going fee-free, we charge of less than the same amount on the prior year. To put that into perspective, that's very half of 1% of our checking accounts for a total impact to the deposit portfolio that is so small that it takes many zeros after the same point to measure it now, every time I hear those stats, sonia, I think that we just can't ignore the fact that fees are part of the problem.

Speaker 2:

If I had any other advice to give after that, Sonia, that was great advice to give, but I think if I had any other advice, it would be to continue to have the conversation, particularly with the continued focus on this topic by the CFPB. The conversation is not going anywhere and it is worth your time to consider the implications to your members.

Speaker 1:

Well, I've enjoyed our time together today and, as we come to a close, do you have any additional thoughts you'd like to share?

Speaker 2:

Just a quick shout out and a thank you to ALM First. We appreciate your partnership, everything you do, and we're glad to be partnered with you as we look to the future.

Speaker 1:

Awesome. Well, thank you so much. I really appreciate it, Jackie and Sonia, for joining us today.

Speaker 2:

Thank you.

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