Analyst Reviews Various Strategies For Generating Income As Spreads Narrow
Depressed loan rates and the resulting narrow spreads, coupled with the rising cost of serving expanding memberships, has forced credit unions to live on less, according to one expert.
The result: many credit unions are finding it necessary to reinvent their business models and rely more on fee and other income to bolster their bottom lines.
"Gone are the days when the question is 'to fee or not to fee,'" said Janet Randall, AVP with CUNA Mutual Group, in remarks before CUNA's Future Forum. "The question today is, 'where can I generate this fee income that's necessary to improve my bottom line?' Credit unions need to look at different areas, such as member services, or member lending, during these times of fierce competition and decreasing net interest income."
In 2001, Randall noted, net interest income averaged $3.58 for every $100 of assets-the lowest in credit union history. "To put this in perspective, in the 1960s and 1970s, credit unions earned well over $5 for every $100 in assets. This number may decline even further as interest rates move up, putting more pressure on credit unions to rely on non-interest income."
Credit unions are also experiencing cost increases for serving their expanding and diverse memberships. Those expenses have increased 85% from the end of 1990, to $215 annually per member (see related story, page 3). "The expense growth relates to meeting our members' product and service demands, and the growing channels necessary to deliver them," Randall said
Other Options Beyond NSF
One commonly recognized revenue generator is the Non-Sufficient Fund (NSF) fee on checking accounts. But there are other checking-related fees that can generate income, yet still provide a good service and value to members, according to Randall xamples are fees on e-checks, debit cards, non-member check cashing, ATMs, and payroll cards in some areas.
Credit cards, student loans and auto loans create other opportunities to generate revenue. But credit unions need to look at their entire loan portfolio to make sure all loans are performing well for them. "Mortgage and home equity loans are the most efficient ways for members to borrow, and the most powerful method of developing PFI (Primary Financial Institution) status with a member," Randall said. "Surveys show that 70% of those members with a mortgage or home equity loan through their credit union identify it as their PFI. Those loans deepen the member relationship."
Important in deepening that relationship is getting a line of credit extended to members. "Preferably, you want to do that at the time of the first mortgage. It's important to open that line of credit, but just as important is getting the member to borrow on it," Randall said. "And, you need to make sure the channels are in place for easy access."
Lending protection, including credit insurance, is another way to add to the loan yield ew on the credit union lending protection scene is debt cancellation, Randall said. "Because debt cancellation is a lending product, and not insurance, it is often easier to offer and administer to members. Debt cancellation offers credit unions flexibility in providing various protection programs that are managed by the credit union, like other loan products."
Non-interest income has become necessary for credit unions in today's marketplace, Randall added. "In order to remain financially viable, credit unions must weigh all revenue options available to them, and then decide which are the best fit for their members and the credit union."