As banking fees in Ireland continue to rise, it’s estimated that further contraction of the market, due to the withdrawal of ACC and Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) from Ireland, will mean a typical household paying upwards of €260 per year for two current accounts. It’s a dramatic change from just two years ago, when the same household could have enjoyed free banking.

Credit unions

ValueWalk suggested in an earlier piece that the Irish market was ripe for a new financial institution to come in and offer a better deal for customers and now it looks like that could actually be happening.

Irish credit unions have been cleared to start operating electronic payments – a move that could see them offering current accounts as early as next year.

Misplaced loyalty

Traditionally, customers of Irish banks are incredibly loyal. Market research company Amarach found that seven out of ten people who opened their first bank account with money gifted at the time of their ‘first communion’ are still with that bank. Now, however, that loyalty is being tested with the bailout of the banks, paid for by taxpayers, and higher banking fees, all of which has left a bad taste in the mouth of many customers.

The decision by the Central Bank to allow credit unions to transact electronic payments for customers means that customers can choose to have their wages paid directly to the credit union, instead of one of the traditional banks. The next logical step would be for credit unions to offer ATM and debit cards to customers.

Ironically, it’s Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY), who’s said they will continue to provide wholesale services in the Irish market, that will provide the payment infrastructure for the 169 credit unions that have signed up.

Banking by the people for the people

Already, a new body has been set up by the credit unions to handle the payments. The Credit Union Service Organisation for Payments will organize the initial transfer of payments from bank accounts, wages or social welfare offices directly to credit union accounts. ValueWalk talked to CEO, Kevin O’Donovan, to gauge what sort of service the credit unions could offer to better the maligned banks:

Who, we asked, would be able to benefit from the new service?

“The service will, in time, be available to all credit unions and their members in Ireland, North and South. New members can apply to join their local Credit Union, as normal.”

How long will it be until the credit unions can offer ‘real’ current accounts with ATM and debit cards?

“We will launch with EFT credits incoming/outgoing in February 2014 and expect to launch the direct debit service in Q3, 2014 with debit cards available by the end of Q4 2014/Q1 2015.”

But the big question everyone will want to know, is if the financial co-operatives will offer ‘free’ banking, or how they will price the service. O’Donovan said that would be up to the credit unions themselves:

“Credit unions are individual entities and it is a matter for each to decide whether to pass on any fees for the EFT service.”

Seeing as the credit unions are ‘non-profit’ financial co-operatives, it likely that any fees will be minimal, which could spell trouble for the big banks.

A new crisis for the credit unions?

Central Bank research has found that at least one in four is desperately unhappy with their current banking provider. Many customers will see free current account banking from the credit unions as a way of getting back at ‘greedy’ banks that were bailed out with their tax money and said ‘thank you’ by hiking fees.

There are already 2.8 million credit union members in Ireland. If credit unions can convince just those customers to use the credit union for their day-to-day banking, then the traditional banks could be facing another crisis.

The big question is, would the state step in to protect the banks? In a surprise development last month, a high court ruling allowed for the €54 million bailout of Newbridge Credit Union, transferring the institution to the Permanent TSB on the basis that it was insolvent – the first time this has ever happened to the credit union. A mere coincidence, perhaps, but the Irish government has invested billions bailing out the banks. For them to fail now would be unthinkable.