MADISON, Wis.-Non-interest income at credit unions may have reached a recent-year high, but multiple threats to what has been a growing revenue stream have analysts recommending it's time for improved and new income approaches.
A number of economists who spoke with Credit Union Journal shared that outlook, painting a picture of a challenging future in which several non-interest income sources in place today will be put to the test and likely deliver less revenue. According to CUNA Mutual Group statistics, credit unions' dependence on non-interest income as a percentage of total income has steadily climbed to 27.3% through Q3 2012, up from 19.7 % in 2005.
There are a number of solutions being recommended, from doing better with non-spread revenue today, urging credit unions to develop even more transaction-driving strategies for debit cards and finding new ways to get the card top of wallet-such as fraud protection services-to re-energizing the credit card portfolio, which many cited CUs are doing (see related stories).
Longer term, though, economists agree the answer is greater usage of CUSOs and getting into new businesses, such as insurance, that leverage credit unions' reputation as well as stay out of the way of the Consumer Financial Protection Bureau.
Many emphasized it's just time to grow more loans to offset an impending non-interest income downturn, providing unique solutions to get more out of indirect auto lending or simply more out of the existing membership. "Look at short-term, high equity mortgage refinances your members need," said CUNA Mutual Group Chief Economist Dave Colby, noting those loans can be kept on the books to increase spread income.
The Biggest Threat
The biggest threat to non-interest income this year, economists stated, is the mortgage refi market being taped out and the accompanying origination and secondary market sales revenue falling off the table.
"This year won't look like last year, so it may be challenging," concluded Dwight Johnston, chief economist at the California and Nevada Credit Union Leagues in Rancho Cucamonga, Calif.
Some, like Bill Handel, VP of research and development at Raddon Financial Group in Lombard, Ill., said the mortgage refi boon of recent years has actually masked a drop-off in non-spread revenue that's already occurring. "For example, we have seen overdraft revenue decline about 20% in the last four years," Handel told Credit Union Journal.
But Michael Moebs, CEO and economist at Moebs $ervices in Lake Bluff, Ill., says OD revenue is coming back. Moebs emphasized dropping price to below $20 to generate more volume while providing an affordable safety net for members (see related story).
Improving Home Sales
Charles McQueen, president and chief economist at McQueen Financial Advisors, Royal Oak, Mich., on the mortgage front is somewhat optimistic. McQueen predicts new home purchase business will increase and make up for the refi downturn.
"Home prices are coming back up and I don't see rates rising for some time. I think we will begin seeing the great American home swap. A lot of people have three kids and a two-bedroom house, and many people looking to retire have a five-bedroom house and need only two."
What will get these consumers moving this year, predicted McQueen, are rising home values, stronger household savings post-recession, and an improving economy. "These individuals now have the wherewithal to make a change. Before they could not stomach losing money on their home. Now they are in a better position."
Whether new home sales or new CU strategies to drive additional revenue help soften the blow to non-interest income, Raddon's Handel says a falloff in non-interest income puts the credit union business model back into balance.
"The credit union industry went through a period of 15 years during which non-interest income became a gravy train. When you look back over many years, this is actually a historical anomaly. Non-interest income grew in its importance to credit unions and I don't think we can rely anymore on the trajectory it has been on. A credit union has to become more balanced in terms of earnings. I think the industry needs to bring more discipline to its pricing policies and get better at managing margins going forward."
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