While credit unions need enough noninterest income to cover operating expenses, they also want to make sure their practices for generating that income remain member-friendly.
Meanwhile, noninterest income has become more crucial due to paper-thin net interest margins— the difference between interest income and interest expense expressed as a percentage of average assets.
“Historically, net interest margin has been our bread-and-butter income stream,” says Mike Schenk, CUNA’s vice president of economics and statistics.
But during the past 10 years, net interest margins have fallen short of operating expenses by an average of 16 basis points (bp). Compare that with the previous decade when net interest margins exceeded operating expenses by an average of 42 bp.
“There’s been a significant shift ,” Schenk says, “and that has required credit unions to look for additional sources of noninterest income.”
So where do they look? Card interchange income and fees tied to member products and services comprise a major chunk of noninterest income. Added to that are premiums for selling mortgages on the secondary market, commissions for selling credit insurance and investments, and other income sources.
The fee scene
Card interchange fees that merchants pay to financial institutions remain a contentious issue. But these fees still provide substantial noninterest income—oft entimes credit unions’ top source of such income—despite drops in interchange rates.
The effects of lower pricing have been off set by increased card activity, Schenk says.
“Credit unions are seeing an increase in the volume of card transactions partly because members are using their cards more in place of cash,” he explains. “Also, in the wake of the financial crisis, credit union membership growth has been more than three times the rate of population growth. So more people are using cards from credit unions.”
Fees on other products and services are another major component of noninterest income. Here Schenk notes a shift in approach over the years.
In the past, credit unions tended to charge fees to the membership generally. Now they’re more likely to be “more thoughtful and scientific about that process,” he says. “They charge fees for services rendered. The members using those services pay the fees.”
As for the year ahead, expect the Consumer Financial Protection Bureau (CFPB) to take “a long, hard look,” Schenk says, at checking account fees, such as overdraft protection (“CUNA: CFPB is gathering overdraft information”).
That scrutiny will involve not only the amount of the fees but also the methods financial institutions use to collect them: How clearly are fees explained to consumers in advance? What are the procedures for assessing fees, such as the ordering of overdrawn transactions?
“I’m not saying that in 2015 we’ll see a significant downward pressure on checking account fee income,” Schenk says. “What I am saying is that an influential regulatory body will be looking at this closely.”
That occurrence may well spark the interest of local media outlets, which may decide to investigate what’s going on at your credit union and other local financial institutions.
“Before that happens, think about your fee practices,” Schenk advises, “and consider whether they’re consumer-friendly.”
Link fees to value
Sometimes credit unions are too skittish about charging fees for fear they’ll annoy members—or even drive them away, says Jason Peach, senior vice president/chief financial officer (CFO) at $165 million asset West Community Credit Union, O’Fallon, Mo., and a member of the CUNA CFO Council Executive Committee.
“Fees aren’t bad if there’s value,” he says, “and convenience is very valuable. We have to make sure we’re not leaving money on the table just because we’re afraid to charge a fee. That money goes back into our cooperative and allows us to have better loan rates.”
A case in point is West Community’s experience last year with instituting a mobile check capture fee. The credit union decided a 50-cent fee would cover costs and be fair to members, who could save the expense and trouble of mailing in a check or making a trip to a branch.
Still, many credit unions don’t charge for remote deposit capture, Peach says. So West Community surveyed its members for input. More than 70% said they’d be willing to pay a small fee for this service.
“It’s important to use real data in making fee decisions,” Peach says. “We’ve found that voiceof- member is an extremely helpful tool.”
Consulting with business partners also is helpful when setting fees, he adds. For instance, advice from John M. Floyd & Associates, a CUNA Strategic Services alliance provider, helps West Community keep its overdraft fees compliant with laws and regulations.
And through participation in PSCU, a credit union service organization, West Community stays on top of technology trends and other developments that could affect noninterest income, which comprises roughly 36% of the credit union’s total revenues.
For instance, West Community’s margins on interchange fee income have remained constant to this point.
“But over time,” Peach says, “we think we’ll see interchange income erode as merchants create alliances” to process card transactions themselves.
Working with PSCU helps West Community “maximize the revenue we get out of our card program,” Peach says.
Whatever the fee types and amounts may be, a major boon to noninterest income is a strong sales culture, Peach suggests. West Community has a 90% loan-to-share ratio, which, of course, translates into interest income.
“But that also generates opportunities for noninterest income in the form of fees and commissions,” he says, “by cross-selling other products and services members need, such as credit life and disability, car warranties, and GAP [guaranteed asset protection] insurance.”
As Peach sees it, one of the best ways to offset tighter margins is to grow your business.
“We look to drive our revenues by serving more member needs and providing the service levels that keep members here,” he says. “That’s more effective than just trying to get more in fees.”
NEXT Strengthening sales and service