Remember Bank Transfer Day? It all started because big banks announced new fees for debit card use and other services. Consumers revolted, and banks soon backed off.
Credit unions benefited from the bankers’ misstep, garnering hundreds of thousands of new members along with a net increase of 740,000 checking accounts during that period. One message was constant: Credit unions are the smarter choice for low or no fee accounts. Some credit unions went so far as to promise “fee-free forever” on certain products.
If noninterest income had been removed from the equation for the past decade, “credit unions’ return-on-assets (ROA) would have been negative by a substantial margin,” explains Mike Schenk, CUNA’s vice president of economics and statistics.Fees on members’ deposit accounts and loans contribute to credit unions’ noninterest income. In 1991, noninterest income accounted for 7% of credit unions’ total income. That nearly doubled to 13% by 2001 and nearly doubled again to 24% by 2011—its highest level ever.
Noninterest income includes fees on deposit accounts and loans, interchange income, gains on sales from mortgages, and other revenues—and it’s vital to offset market forces that put pressure on ROA, Schenk points out.
Consumers have become more accustomed to “free” and more averse to “fee.” They’re more likely to shop around, which is a good thing for credit unions, which generally have fewer and lower fees,” Schenk says. Credit unions also appeal to consumers with lower loan rates, member-friendly policies, and democratic control.
Schenk notes that many credit unions are striving to reduce back-office redundancies and work cooperatively to reduce operating costs, all of which eases pressure on the bottom line.
But reducing expenses can only do so much. That’s why more credit unions are exploring pricing strategies to serve members’ financial needs, strengthen member relationships, and maintain a healthy bottom line.
‘Whack a fee’
One credit union that helps members save on fees while simultaneously increasing fee income is Montgomery County Employees Federal Credit Union (MC EFCU), Germantown, Md., $87 million in assets.
► Increasing member transactions is one strategy to avoid fees but earn income.
► Promising members “fee-free forever” can make it challenging to generate income during a tough earnings environment.
► Board focus: Understand the competition and members’ tolerance for fees as you develop pricing strategies.
On its website (mcefcu.org), the credit union recently advised members to “whack a fee” by moving their business to the credit union from banks, where fees keep popping up. The credit union also increased its fee income by 50% over five years—from $1.4 million in 2007 to $2.12 million in 2011—moving its bottom line from the red to the black.
Boosting fee income played a critical role in shifting from an operating loss of $709,238 in 2009 to an operating gain of $417,134 in 2011, says Jim Norris, president/CEO.
Paradoxically, MC EFCU’s first step toward restoring the bottom line was eliminating two fees that annually generated $80,000: fees on shared-branch and foreign-ATM transactions.
“The more transactions members conduct, the more profitable those members are going to be,” says Norris, who joined MC EFCU in 2010. “We did away with a couple of fees to generate those transactions.”
Creating more transactions generated more revenue from the credit union’s largest source of fee income: a nonsufficient funds (NSF) fee of $30 for overdrafts and an overdraft line of credit program that carries an 11% interest rate.
The same principle was applied to credit cards in early 2012 when a new campaign offered 0% interest and no fees for 12 months. After a year, the interest rate rose to 8.9%, but still with no fees. The three-month campaign increased the credit card portfolio 25%, from $6 million to $7.5 million. The credit union’s offer saved members $240,000 in fees and interest, based on a 15% interest rate, Norris says. MC EFCU gave up its income from the fees and interest in exchange for building credit card balances.
“We know from our research that our members have very good credit relationships, but those relationships happen to be elsewhere,” Norris says. “We wanted them to be here, and credit cards are a relationship account.”
In addition, the credit union has:
► Refined lending products;
► Added text and mobile banking;
► Introduced remote deposit capture (RDC);
► Provided “me-to-me” transfers so members can move funds to accounts at other financial institutions; and
► Added person-to-person transfers.
The credit union soon will launch a new “Member Value” program, with the tagline “Do More, Get More.” The program links members’ balances in qualifying accounts to additional free services. Norris also expects to add fees linked to products and services that generate “added value” for members, such as insurance or investment products.
NEXT: Problems down the road?